There is a dreary British tendency to blame our retailers both for making money and for failing to do so. Last week brought news that Tesco’s pre-tax profits had broken the £1bn threshold for the first time. This was greeted in some quarters – though not in the City, where Tesco’s results were in line with expectations – as an act of tactless vulgarity, given the long-term suffering of the agricultural industry and the current foot-and-mouth crisis.
Meanwhile, there are plenty of people who still grow misty-eyed at the mention of Marks & Spencer’s hegemony in the high street. Sycophantic applause – though probably not from farmers – used to greet the board of M&S when it took the podium at AGMs. These days there are those who will still claim that it’s tragic – as if a company’s management has no control over its own destiny – that M&S no longer breaches the £1bn pre-tax barrier.
As recently as 1997 and 1998, M&S did just that (£1.1bn and £1.15bn respectively). In retrospect, this was apparently a good thing – or, at least, better than the sorry financial state that M&S finds itself in today. But it seems that for Tesco to be doing so today is a very bad thing indeed in popular consciousness. As one exasperated retail City analyst puts it: “Does this country want a profitable retail industry or not?”
One fact that is abundantly clear to anyone who examines Tesco’s figures for the year to February 24 (beyond the rather fatuous assumption that £1bn is a lot of money) is that the company has not been profiteering. The chain’s operating margin remains consistent at six per cent, so the increased performance must have come from volumes rather than from a rip-off at either the supply or the consumption end of the equation. An increase in sales of 11.7 per cent to a shade below £21bn would appear to endorse this analysis.
This kind of arithmetic fails to impress the wiseacres of the National Farmers’ Union and the Liberal Democrats, the latter demanding an independent retail regulator to rein in the alleged excesses of Tesco.
It’s not just the crassness of the arithmetical ignorance here, but also the assumption that Tesco would allow itself to be the butt of profiteering criticism so soon after a Competition Commission inquiry cleared it and its competitors in the retail food industry of exerting undue pricing pressure on suppliers. I have been no apologist for the superstore chains over the years, but even I see that they are unlikely to have been implementing purchase-price regimes that screw suppliers at the very time that the regulators are examining whether they might be doing so.
But the real shame in the vilification of Tesco must lie in the failure of British culture to accommodate a business-like attitude. As a nation, we seem more concerned with wearing our economic heart on our rolled-up artisans’ sleeves than with the processes of prosperity.
‘s Prime Minister Tony Blair must accept a good deal of the blame for this, with his casual talk (subsequently – but belatedly – corrected) the other day of the supermarkets having the farming industry in an “arm lock”. It is the lazy psychology of the junior common room revolutionary that concentrates not on the opportunities presented to Tesco by its earnings nor on the sad decline of M&S, but on a dramatic bottom-line figure in the case of the former and on the chairman’s bonus in the case of the latter.
The real issues to examine in relation to Tesco’s wealth and M&S’s lack of it are whether the former will be the victim of hubris and whether the latter has met its nemesis. There is a certain superstitious quality to Tesco’s £1.05bn pre-tax figure, coming as it does just as we embark on an economic slowdown that looks like it will be a recession of some degree. Put at its simplest, is today’s Tesco tomorrow’s M&S?
I think not. Tesco’s chief executive, Terry Leahy, does not lead his management with the kind of complacency that characterised the later days of Sir Richard Greenbury’s stewardship of M&S. And, even looking at Tesco’s expansion strategy, there is no undue cause for shareholders to be alarmed that cash will go to its head.
While M&S chairman Luc Vandevelde is belatedly closing continental European outlets (and then being told that he can’t by stroppy French labour lawyers), Leahy is evidently unconcerned with flexing Tesco’s financial muscle with international consolidations. His view is that Wal-Mart excited its competitors’ defensive instincts when it moved into Europe with the purchase of Asda and others, and the merger between Promodes and Carrefour in France further fuelled the desire among investment bankers to encourage consolidation.
But that doesn’t mean Tesco has to respond. Leahy looks to economic value, rather than paper value. And Leahy is leery of alleged cross-border synergies. Tesco would rather look for organic growth from developing economies, such as Thailand and Hungary, which have already contributed well to earnings.
So no one should adopt the view that after £1bn of earnings there is only one direction to head in. And, please, let’s also stop looking back with fondness to M&S’ heyday, at the same time as kicking Tesco now that it has broken through the £1bn barrier.
George Pitcher is a partner of issue management consultancy Luther Pendragon