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Tesco’s Leahy steps down on a high note

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CHESHUNT, England — Two seminal events will be remembered when retail historians look back on the spring of 2011.

Two seminal events will be remembered when retail historians look back on the spring of 2011.

They are the retirement of Tom Ryan, the amply and justly praised chief executive officer of CVS Caremark Corp., America’s largest and most successful health care retailer; and the retirement of Sir Terry Leahy, the legendary chief executive officer of Tesco PLC, the largest and most successful mass retailer the United Kingdom has yet produced — or is likely to replicate in the lifetime of those executives who currently practice the art and science of mass retailing.

Much has been written of Ryan and his considerable achievements as head of CVS for the past 17 years, a tenure never equalled in the annals of chain drug retailing, for either its longevity or its accomplishments. Conversely, relatively little has been written in this country about the arguably more impressive achievements of Leahy, who will surely be recognized and remembered as the most gifted executive to head a U.K. mass retail company.

When Leahy was named Tesco’s chief executive in 1997 the grocery retailer had only recently overtaken J. Sainsbury PLC to become the United Kingdom’s biggest retailer.

"Even that position was a tenuous one," Leahy remembers.

At his departure 14 years later Tesco was easily the United Kingdom’s leading food retailer and the world’s third-largest retailer. At the same time the company had become the most successful, if not the largest, global retailer ever assembled, with a significant presence — and, in several instances, a No. 1 market share — in no fewer than 14 countries across three continents. It holds a leadership position in Ireland and in Poland, Hungary and Slovakia in Central Europe, and it is similarly well situated in China, Japan, Malaysia, South Korea and Thailand. As well, it has established a successful retail enterprise in the Czech Republic and Turkey and is poised to begin opening retail stores in India, where it is launching a wholesale business and has a franchise agreement with a local player.

In the United States, a country Tesco entered just three years ago with the arrival of its Fresh & Easy convenience store format, Leahy has faced his most daunting challenge. Yet with the opening of the retailer’s first Fresh & Easy stores in Northern California earlier this month, the concept appears to be on stronger footing today than at any time since the first Fresh & Easy stores were opened in the fall of 2007.

At present 160 of the convenience stores do business in three states. Per-store volume is higher than it’s yet been — and Leahy predicts that the stores will turn a profit in another two years.

"Whenever we’ve entered a new international market, it’s taken us six or seven years to become profitable," he says. "The U.S. won’t be an exception. So despite the economic downturn in America, which set us back, and the fact that we made some initial mistakes — not offering a sufficiently broad private label assortment, for example — we’re pretty much where we thought we would be at this stage with Fresh & Easy."

But global penetration and expansion is only one of Leahy’s accomplishments. Where Tesco could accurately be described, before his arrival as chief executive, as just another grocery retailer, the company can now point to a dynamic and growing general merchandise business, one that effectively ties its store assortment with a quarterly catalog that is linked to a booming online business. And, where the company once sold only merchandise, it is now a major merchant of an astonishing array of financial and consumer services that range from banking and vacation packages to its own mobile phone business.
Clubcard, the loyalty program Leahy launched in 1995, has become the retail industry standard, the program all adherents to the concept ultimately seek to emulate and adopt.

The retailer’s online grocery model, one initially derided because it was different from all the others — the primary difference being the use of individual stores, rather than a dedicated warehouse, for order-picking and distribution — is today the model other retailers study when drawing up an online retail program.

Perhaps most impressive, under Leahy’s leadership Tesco’s nutrition and sustainability initiatives, rolled out over the past decade with a commitment by the chief executive to position the company at the forefront in addressing the nutritional and environmental concerns that had begun drawing attention and interest within the retail, supplier, government and consumer communities globally, have already become the standard against which all present and future efforts are sure to be measured. Individual initiatives are designed to reduce the carbon footprint, provide consumers with nutritional information about the products they buy, lead individual communities in reversing decades of environmental neglect, and advance consumer consciousness and knowledge of the environment by opening environmentally friendly stores.

As the spokesman for these initiatives, Leahy has already succeeded in attracting and engaging a significant segment of the mass retailer and supplier communities throughout the world. Most recently, Leahy, speaking at the global economic forum in Davos, Switzerland, announced the opening of two zero-carbon stores, in the Czech Republic and Thailand (another two are already in operation in the United Kingdom), and called on governments to establish conditions that facilitate private sector efforts to address environmental issues.

"Regulation has its place in setting the right framework for action on climate change, for example, through an effective carbon price," he said. "But I believe in the power of the market and in people’s creativity to tackle major challenges. Governments can help create the right framework, but they cannot match the energy and innovation of the market."

This month the man behind these and other groundbreaking initiatives too numerous to mention, the executive who has become, in this generation, one of the two or three most respected practitioners of the retail art anywhere in the world, stepped down. As he said recently in his Cheshunt office, he wants to do other things — lecture, teach, invest in entrepreneurial businesses, get involved in community activities and "give back some of what has been given to me."

When this quietly unassuming, yet disarmingly open and honest man assesses his career, he is nothing if not realistic, fairly claiming credit for his successes and frankly discussing his failures and setbacks.

"Disappointments and failures are part and parcel of success," Leahy says. "When you take risks, you are bound to suffer setbacks. I believe that what we’ve created at Tesco is an organization that’s not averse to risk-taking, provided the risks we take are well conceived and closely studied. That being the case, disappointments naturally follow."

But Leahy is most of all a realist — and the astonishing performance that has characterized his 14-year tenure as Tesco’s chief executive officer comes most readily to mind. "I’m pleased that I left the business stronger than I found it," he says, characteristically understating that significant achievement.

When Leahy was named Tesco’s chief executive in 1997 the company recorded pretax earnings of £750 million on sales of £14.98 billion. He leaves a company whose sales in the fiscal year that ended February 2010 were £62.5 billion, while pretax income totaled £3.18 billion. Both were records. More important, the company’s total sales placed it third among the world’s retailers, surpassed only by Walmart and Carrefour.

The outgoing chief speaks equally easily about his success in finding growth opportunities outside the United Kingdom. "When we first announced that we intended to open stores in Central Europe and Asia, our shareholders were skeptical," Leahy notes. "They thought, frankly, that we were late in expanding globally, that other retailers — Walmart, Carrefour — were already there. The reasoning behind our decision to expand globally was simple: Even if we were to become the market leader in the U.K., that’s only 3% of the world’s GDP. By growing internationally, by determining we would no longer be just a domestic company, we expanded our potential — and our opportunities for growth. Clearly, however, we were taking a risk. Happily, it has paid off."

Leahy is enthusiastic as well about the culture he helped create around Tesco, instilling in the retailer a set of values that made people want to work for the company. "I believe we made our people proud of Tesco, made them want to belong," he says. "That’s what you need if an organization is to be successful."

Asked to list the key programs that enabled the company to grow, Leahy puts the introduction of Clubcard at the top of the list. "Our Clubcard program opened the door to so many initiatives," says Leahy, "not only by helping us identify our key customers but by enabling us to collect meaningful data on the way they shop and the products they buy."

Clubcard, he adds, also opened the door for Tesco’s entry into the financial services business, another achievement of which the outgoing chief executive is justly proud.

"How clever or visionary is it really for a retailer to identify itself as a company that sells only products?" he asks rhetorically. "We broadened that definition by defining Tesco as a retailer of both products and services. The data we collected from our loyalty program told us that our customers would be interested in buying financial services from us. So we developed an inventory of retailer services we believed our customers would respond to — and they have."

Leahy speaks of Tesco as a “lifestyle” retailer, a company that distributes products and services that meet the changing demographics and needs of its customers. "Industries and businesses change slowly," he says, "while people’s lives change very quickly. As they get wealthier, they spend more on services. So we have based our business on our customers and their lives. We believe staying close enough to our customers provides the safest strategy for the long term. And Clubcard has enabled us to do so."

Of course, Leahy’s tenure at Tesco has not been free of challenges. Creating a culture that encourages risk-taking, he believes, also increases the chance that all will not always go as planned. He’s particularly critical of the inquiries the U.K. government made several years ago into allegations that Tesco’s size and tactics inhibited competition.

"I believe," Leahy says today, "that there was not sufficient evidence to show that our business practices were of a nature to harm the public interest. Rather, we were being punished for being too successful. That being the case, however, we shouldn’t have made ourselves so vulnerable in the first place."

No matter. As Leahy departs, he leaves amid the glow of a performance that will be recorded and remembered as among the most memorable in the annals of the U.K. business community. Moreover, it is only just that he leaves on his — and his company’s — highest note: the commitment to sustainability. While that commitment is still in its infancy, it is demonstrated clearly in Tesco’s words and deeds. The company today is more committed to the future of the planet’s environment, and the 6.8 billion people who live in that environment, than any other business on the planet.

It is a fitting climax to a brilliant career.


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