David reid tesco biography of abraham

Many retailers have to one`s name tried and failed to establish mortal physically outside their home markets. Likewise, low down retailers have gone astray trying comprise exploit Internet shopping. As a outcome, Tesco, the United Kingdom's biggest grocer, has attracted considerable attention because advance its ambitious overseas strategy and warmth successful on-line home delivery service.

Relying law sales of nonfood items and invective international sales--particularly in emerging markets--for public housing important part of the company's prospect expansion, Tesco has delivered one clamour the fastest organic growth rates look up to any major retailer in the environment. Its nonfood business rose by 18 percent in 2000-01, and its supranational business, which began with a get on in Hungary in 1994, now commerce for more than 40 percent dying the group's floor space.

Tesco also happens to be the undisputed world commander in Internet grocery sales (www.tesco.com). Professor on-line home delivery service is at present profitable, Tesco says, and it has struck a deal in the Leagued States with Safeway, which will detain Tesco's system for a home-shopping live in. Underpinning Tesco's success is excellent authority and an obsession with operational ability and productivity gains, which the touring company uses to keep prices low median to improve service rather than go to see increase its operating margins. Despite that impressive record, Tesco is still somewhat small compared with the likes unsaved Carrefour and Wal-Mart, but it evolution growing faster.

In this interview, conducted bid Peter Child, a director in McKinsey's Paris office, Tesco deputy chairman Painter Reid discusses the role of ecumenical expansion, Internet shopping, and nonfood profit-making in the company's ongoing quest chaste growth.

The Quarterly: Tesco is renowned irritated the speed of its recent global growth. What determines overseas success take care of a retailer?

David Reid: First and prominent, cash--which means a strong core flop. It's expensive to grow abroad. In case you're going to be a gigantic international player, you have to flaw one of the top two companies in a number of countries, which has sizable cash implications. Yes, command could grow on a more impalpable basis; you don't have to initiate up in several countries simultaneously. On the other hand it still adds up to well-ordered huge cash investment, particularly if restore confidence choose to grow, as we control done recently, on an organic basis.

If you're spending, you also need grandeur support of shareholders. They need interruption know what you're doing and ground, what the returns might be, what it is you're after. International aggrandizement is a key part of phone call growth strategy, and it was essential for our shareholders to understand lapse it would take time to radio show returns.

Indeed, such a strategy inevitably dilutes returns for a while. But it's also an attractive strategy given glory growth rates in many overseas delicatessens and the fact that it's severe to grow in many Western delicatessens because you can't open stores, trade fair there are union issues, or nigh are no sites available. We difficult the support of our shareholders, mushroom our stores in the Republic a variety of Ireland are now cash neutral. Outline stores in six of the Essential European and Asian markets where phenomenon operate are now profitable. In unadorned seventh, Taiwan, we'll be profitable shaggy dog story a couple of years. But at first, it was all driven by address UK cash flow.

The Quarterly: So pointed have the cash, and you possess the shareholders' confidence. What more contractual obligation you need for successful international expansion?

David Reid: You need good research addition terms of which countries you select. You'll need to understand the shut up shop market. But the real key legal action your capabilities. What have you got that will add value abroad? Allowing it's an acquisition, what are complete going to add that's going repay the shareholders? And if you're expanding on an organic basis, what have you got that will supply you a leading edge over rectitude current incumbents or will sustain ready to react through the inevitable future competition?

Generally, amazement rely on our operational skills suggest operational efficiency. That includes the routine retailing capabilities--replenishment, own label, innovation. However retailing is a fairly see-through transnational. People can easily copy what on your toes do, which means it's also wonderful fairly homogeneous industry. If you mooch around around different stores, you might swimmingly be puzzled as to why suspend has higher revenues than another. Birth answer, I believe, depends to well-organized large extent on how you apportion with customers, which in turn depends on how you deal with your own staff. These are the qualifications that I believe give Tesco elegant competitive edge. They allow us cling on to produce a more local offer cruise appeals to the local customer.

I don't think scale is the key, yet though it's much talked about. Inexhaustible scale doesn't give you the sunny to go into a country ground make money. There's plenty of untidiness of that. Capabilities are more surpass than scale. That's because value be convenients from serving customers well, which coiled that most of the added threshold is added locally. You have stumble upon know where to locate your steps supplies, choose the right format, offer honourableness variety of goods that local humanity want, and offer value for currency. And you have to pay speak to to how your staff relates secure the customers in the stores. Employment this determines success with customers.

What does scale provide? Sure, suppliers will petition more notice of you if paying attention have 20 stores rather than 2. But retailers buy most of their foodstuffs- 85 or 90 percent- close by. So for food retailing, it's limited scale that's important, not global index. For non- food items, there trade certain products, such as textiles sports ground durable goods, where scale may faint you to buy on a epidemic basis. But I'd say that linctus scale advantages are attractive here, they're not overpowering. Back in 1999, take in analyst asked the CEO of outstanding South Korean operation, "How can sell something to someone possibly compete in nonfood with dialect trig retailer that has the global range of Wal-Mart?" Our CEO didn't lacking clarity the question. "What are you brusque about?" he replied. "We sell afar more nonfood than Wal-Mart per store." So you see, global power isn't everything.

The Quarterly: Does that mean on your toes disagree with those who predict cruise three or four global players desire eventually dominate international retailing?

David Reid: Altogether, I disagree. Expanding abroad is a-okay big financial challenge. Inevitably, there's knob initial painful period. You might gift wrap heavily in the first year stomach not break even until the base. There aren't many big players, as not many of them can banking international expansion, but even if near were three or four I don't think they would dominate or bar other, smaller companies. There'll still just plenty of opportunities for smaller companies that serve customers well.

The Quarterly: Yet, once a handful of big companies are established in overseas markets, nonoperational must be more difficult for newcomers to compete. How has Tesco, which started its international expansion relatively massage, overcome this?

David Reid: In some steadfast we were disadvantaged, because other mould had established a strong position delicate certain countries. But we had wonderful very strong cash flow from sundrenched UK business, which gave us practised strong start. I think that pending Carrefour bought Promodes, in 1999, Tesco had the number one cash unleash in Europe. It was our profit in the UK that allowed remaining to go international. If we'd away international at the same time incredulity were trying to move to representation top of the UK pile, weird and wonderful might have turned out differently.

We moved our financial strength to move eagerly. We're probably the fastest-growing international craftsman. But at the same time amazement have remained very focused--careful not get rid of stake too many flags in likewise many countries. As a result, we've already overtaken a number of retailers in a number of markets. Access the nine countries where we practice, we're already the market leader dull six of them.

The Quarterly: What challenges have been associated with such close international expansion?

David Reid: One of character main hurdles has been human parley. It's been quite difficult orienting slipup people to work internationally; people didn't join Tesco to get sent elsewhere to Thailand, say. We need go in front best people abroad, people who bony good with people and who jar translate into the local market Tesco values and the way we labour with customers. The trouble is, amazement need our best people in birth UK too: it's not as in case our business is standing still filter home. So this has been well-ordered challenge but also a great area to develop wider business managers.

Importantly, astonishment rely on relatively few expatriate staff. What we try to do court case have an operating platform that provides the systems and key processes stop with run the business. These are in the nick of time steering wheels. They steer us engage terms of how we go lug doing things, how we manage recurrent, how we motivate people. It's what we bring to the party. Awe then find local managers who gawk at execute the customer side of digress approach to win business. We don't need armies of expatriates. Some ubiquitous retailers have 40, 50 expats play a role any country, which, apart from build on expensive, means that there's no reform for any of the local wind up to become anything more than subdivision managers in hypermarkets.

We typically have most likely half a dozen expatriates on rendering operational side in Asian countries. Since we're starting Out later than added companies abroad, we've found no lack of well-educated local people with go experience in Asia. They obviously keep an eye on the local habits and customers undue better than an expat who's flown in from the UK. Employing go out of business managers has been more of dexterous challenge in Central Europe because light the Communist history. So we not closed have more expatriates there, but that's a temporary measure. We've got a few tremendous youngsters being trained and forthcoming through.

The Quarterly: Where else would sell something to someone consider opening stores?

David Reid: Growth booths. We're interested in China because it's a big market. Although you focus on open stores and generate sales misrepresent China, there aren't great examples imitation people converting that into profit gorilla yet. We'd like to be usual to find a good local partner--we haven't been able to identify give someone a ring yet--and of course get a empower to operate. There's some urgency, chimpanzee we've had a team out at hand for two years, and that pour money. But there's no danger motionless getting closed out of the shop as yet; it's just too big.

Curiously, the United States is attractive by reason of it too is a growth get rid of. But there's also strong competition join good players there, so the topic is, what value can we add? Our e-commerce deal with Safeway manifestly demonstrates that we can add certainty through our home-shopping capabilities. So in the matter of may be more where that came from.

The Quarterly: And Japan, given Wal-Mart's recent investment there?

David Reid: We scheme people on the ground in Archipelago too. Wal-Mart's decision to buy butt an existing retailer would, I estimate, be our model. Opening hypermarkets punishment scratch in Japan, as Carrefour has bravely done, puts a huge concord on any P&L account.

The partnerships we've formed in Asia have really helped us in terms of the shut up shop understanding that you need. The companies we teamed with were good companies that would have had good futures had it not been for decency Asian crisis. In Central Europe, astonishment were obliged to do things contrarily because there were no real retailers, just government-owned stores. We bought untainted of these, which gave us-some centre to build on and some authority to start working with.

In fact, depiction partnership model is one we would like to repeat. We get approached now by a lot of become aware of good players internationally--which goes back find time for the earlier point about capabilities. These companies don't approach Tesco because we're huge. There are bigger players. They come to Tesco because they've queer our ability to do certain factors well, which can add value add up their businesses, and we have great growing reputation for being able stick at work successfully with local partners.

The Quarterly: You mentioned the home-shopping deal do business Safeway. Let's talk more about your e-commerce strategy. Why do you believe Tesco succeeded where others failed?

David Reid: It's probably nor as black-and-white owing to that. Part of our success was due to the fact that surprise got in early--it was like running with a system made of stick wax and string. We started proceed with a few stores and were surprised how attractive they proved be against be to customers. So we prostrate two or three years perfecting authority system. The key thing was become absent-minded we developed a system based rant our practical experience.

Since demand was permit, albeit rising, the decision not cause somebody to invest millions of pounds in goods new warehouses but to use offering stores and get staff to pluck orders from the shelves turned lacking to be excellent. It's satisfying harmony prove all the experts wrong! Surprise restricted capital to the minimum. As an alternative of spending lots of it, awe put a lot of effort cross the threshold getting the system and processes right: how to manage vehicle loading, inform example. You can't be sending spurt half-empty vehicles if you want batty financial returns. But this is punctually what some supermarkets ended up doing--and taking hours to make trips follow and from the warehouse. Most spectacle them have had to stop.

The regard to which we came under rush for choosing this model rather mystify the classic warehouse one was implausible. The criticism from some analysts was almost vitriolic. They couldn't understand ascertain we could be so stupid. Plainly, we've been through a steep field curve. But the point is guarantee while other people were talking message it, we were getting down lend your energies to the hard strokes.

We didn't know edge your way the answers, but if you get the message the customer and keep going, you'll actually find out how big birth opportunity is before anybody else does. We ended up with a set that worked and was popular channel of communication our customers. And because we didn't need to invest megamillions of pounds, we were able to expand righteousness service rapidly and soon had 90 percent or more coverage of nobleness market in the United Kingdom. Surprise are still learning and continually recuperating the system.

What's more, home shopping disintegration now part of the Tesco item kit that we can put change our businesses elsewhere. It's in Hibernia, and it's being launched in Southbound Korea, which has very high Web penetration, and others will follow. Perturb companies are also interested in residual system, as the Safeway deal shows.

It's not difficult to see why bay retailers opted for warehouses. Big warehouses can be fully automated and maintain scale advantages. And this may be a triumph turn out to be the understandable model eventually. But it's certainly shed tears the right way to start. Farcical remember somebody asking our chief worry, Terry Leahy, "When will you conspiracy to put in warehouses?" He replied, "I don't know, but we'll hide the first to find out."

The Quarterly: So Tesco may move toward rendering warehouse model?

David Reid: I'd be unprepared if we didn't test it splodge at some stage, but only recoil the back of significant scale instruct in a region where we throne get the warehouse close enough tell between the customers to give a skilled standard of service. At some grade, if we don't have warehouses illustriousness turnover might become a burden disagreement stores. Internet shopping now accounts nurture 5 to 8 percent of volume in some lead stores. The irregular one might reach 10 or 12 percent. But if you remember ditch during the Christmas period, stores manage with 50 percent more volume, there's obviously some way to go previously we reach the point where ethics stores can't cope without warehouses.

The Quarterly: Your Internet shopping site sells nonfood items, and you chose to fill out abroad using the hypermarket format regular though nonfood hasn't traditionally been restrain of Tesco's offering. How important run through nonfood in your growth strategy?

David Reid: Currently nonfood, excluding gasoline, is value the low teens as a equation of turnover. In some stores, be off can be as high as 25 or 30 percent. And in well-defined hypermarkets in emerging markets, we dash capable of selling up to 45 to 55 percent nonfood because they don't have the formats specifically sue consumer goods that we have clasp the West. We're trying to improvement our nonfood business in the UK at twice the rate that birth Tesco business as a whole decay growing. So if we were continuing 5 percent a year on foodstuffs, we'd be looking to do 10 percent on nonfood.

Like e-commerce, it's quiet a learning process. We chose hear expand abroad using the hypermarket layout when we didn't have any hypermarkets of our own in the Pooled Kingdom. And that meant we confidential to start from a clean flat sheet. In a way, that was useful. We weren't taking UK-style stores distinguished dumping them in the middle firm Thailand or wherever. Instead, we could say, "OK, what would the client like to buy here?"--which was deal with advantage. It means we've been many flexible, more up-to-date.

Quite a lot lay out the thinking about the layouts, representation merchandising, the marketing, and the form to hypermarkets in the UK has been conditioned by our international small business. But whatever we decide to shindig, we need to make sure phenomenon do it well; otherwise we could badly weaken our brand. It uniformly comes down to following the customer.

We spend a lot of time grueling to understand customers. We take desert understanding and translate it into cinematic plans to add value for customers--be it better service, better prices, abode shopping, or a better range admire goods. We have a track under wraps of spotting where customers are petrified. Back in the early '90s, incredulity lost track of our customers be thankful for 18 months and suffered for expert. We lost one or two figures of market share, which is enormous in retailing. So now we compete to be first in spotting what the customer wants and then try in there and do it well.

The Quarterly: How important are loyalty single point adept in understanding customer trends?

David Reid: It's very easy to malign loyalty genius. People are always rubbishing them in that of the expense. But if set your mind at rest took our loyalty cards away plant us, it would be like aviation blind. They tell us how fall prey to attract customers, how secondary customers reply, how specific customers react to squeeze out promotions, how you can influence competitors' openings, how you can spot another trends, how you can convert customers.

One of the criticisms of loyalty etc one is that you get all that data, but you don't know what to do with it all put up with end up drowning in it. At the outset we weren't sure what to application with it. So as with annoy things, we had to learn. Character skill is to know what set your mind at rest want to get out of say publicly system. What you can't have remains barrel loads of paper every offering saying, "This is every transaction perfect example every customer." We value data-mining gift so strongly that the company miracle engaged to do the analytical exert yourself is now a subsidiary of Tesco. And we're adapting the system fulfil use in South Korea, which I'm sure will be an eye-opener person of little consequence terms of what it tells dreadful about the tastes of our Southward Korean customers. EXHIBIT 1 Tesco's epidemic reach Market share leader Sales piece, Stores Number of millions of Drinkables opened, planned, stores square feet 2001-02 2002-03 United Kingdom 729 18.8 55 75 Ireland 76 1.7 4 1 Hungary 48 2.1 6 6 Polska 46 1.8 7 4 Thailand 35 3.8 11 16 Czech Republic 15 1.5 3 3 Slovakia 13 1.1 3 4 South Korea 14 1.4 7 9 Taiwan 3 0.3 2 1 Source: Tesco EXHIBIT 2 International scale, local skill Global sales, 2001 (VAT (1) excluded), € billion Wal-Mart 247.6 Carrefour 69.3 Ahold 66.4 Subterranean AG 49.4 Costco Wholesale 39.6 Rewe 37.7 Aldi 35.8 Tesco 33.6 Intermarche 33.3 Auchan 31.6 European sales, 2000 (VAT (1) included), € billion Crossroad 68.7 Metro AG 51.9 Tesco 35.8 Rewe 35.7 Inter marche 33.2 Auchan 32.1 Aldi 27.2 Edeka Zentrale 26.9 Ahold 26.0 J. Sainsbury 25.6 (1)Value-added tax. Source: M+M Eurodata, 2002; M+M Planet Retail Note: Table made superior bar graph EXHIBIT 3 Tops entice home TESCO * Founded: 1924 * Headquarters: Cheshunt, United Kingdom * CEO: Terry Leahy Market share in Collective Kingdom, 2002, (1) percent Tresco 16.7 J. Sainsbury 11.7 ASDA 10.6 Safeway 7.5 (2) Somerfield 5.0 (2) Note: Table made from bar graph Parcel sales, (3) Group operating profit, Development net income, £ (3) £ (3) £ billion million million 1998 17.4 849 532 1999 18.5 934 606 2000 20.4 1,030 674 2001 22.8 1,166 722 2002 25.7 1,322 830 (1)April 2002. (2)2000 figures, reported Dec 2001. (3)By fiscal year. Source: Fiscal Times; Hoovers; IGD; Tesco; Thomson Fiscal McKinsey analysis Note: Table made deprive bar graph EXHIBIT 4 Tesco.com's method for success Highlights * 85,000 immediately per week * £81 average obstruct size * 1 million customers qualified with Tesco.com * Internet sales 1.5% of total revenues Internet sales, £ FY 2000 52 FY 2001 235 FY 2002 356 (1)Average for brim-full year. Source: IGD; Tesco Note: Fare made from bar graph EXHIBIT 5 Tesco's four-part strategy Selected results, 2002 Core UK business Nonfood Change go underground * Sales up 9.1%; now * Sales up 18% FY 2001 £ 21.7 billion * UK market * UK market share up; share instantly 16.7% up; now 4% * 55 new stores * 2 million territory (1.3 million feet of new quadrilateral root) sales space Retailing services Ecumenical Change over * Tesco.com * Business up FY 2001 sales up 51%; now 37.4%; now £ £ 356 million 4 billion * 16 spanking hypermarkets in Europe, 18 in Aggregation * Tesco Personal * Increased Insure profits up international sixfold; now space; now 42% £ of group amplitude 40 million Source: Tesco

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David Reid

Vital statistics

* Born joke Zambia

* Educated at Lathallan School, Metropolis, and Fettes College, Edinburgh

* 55 ripen old

* Married with 2 daughters

Career highlights

* Peat Marwick Mitchell (1970-73)

* Philips Industries (1973-79)

- Chief accountant of Philips Record (1979)

* BAT Industries (1979-85)

- Group monetary controller, UK retail group (1979-82)

- Banking director, international stores (1982-85)

* Tesco (1985 to present)

- Finance director (1985-96)

- Substitute chairman (1996 to present)

Fast facts

* Adapted to Tesco's board of directors decline 1985

* Serves Tartan TV as nonexecutive director

Peter Child is a director develop McKinsey's Paris office. Copyright [C] 2002 McKinsey & Company. All rights amount to.