Handling high stakes at Tesco
Alan Stewart took over as CFO at Tesco when its core UK business was in trouble. He tells Amy Reeve how he helped turn the global retail giant around, and the role of technology, sustainability and clarity in retail
Consumers are a demanding bunch. Our expectations are high and our pursuit of value, quality and convenience affects every company in a supply chain, whatever sector it’s in. But the stakes are particularly high in the grocery industry. Ferociously competitive and buzzing with new challengers, the sector is increasingly driven by technology.
The way fast internet connection speeds, high smartphone adoption and easy-to-use financial payment systems in South Korea, Japan, France and the UK, for example, are driving online grocery shopping means retailers must invest heavily in high-end technology as well as bricks and mortar, even though online grocery purchases are a small fraction of what customers spend in supermarkets.
Exponential growth in sales of groceries through e-commerce platforms in Thailand, Malaysia and Vietnam means retailers in these countries are also working out how to keep connected consumers happy at the same time as making their online channel profitable.
They’re not just beholden to fickle consumers, either. The weather has the potential to wreak havoc on the bottom line. Cyclone “bombs” on the east coast of the US and the “beast from the east” and soaring temperatures in the UK and across Europe undoubtedly influenced customer behaviour this year. But it also affected crop yields. And a bad yield for farmers means pressure on prices for consumers, who in many countries are already feeling the affect of subdued wage growth.
That said, when a grocery retailer gets it right and offers what the shopper feels to be a seamless experience, on- or offline, it’s a lucrative sector to be in. Research organisation IGD says the global grocery retail market will add $2.7trn in sales by 2022 with the Asian market alone contributing $1.2trn. Supermarket chains inevitably feature on global lists where the big bucks are made.
On Deloitte’s 2016 Global Powers of Retailing Top 250, Kroger (US), Schwarz Group and Aldi Group (Germany) and Carrefour (France) all featured in the top 10 with annual revenues of billions of dollars. Sitting pretty at number 11 was Britain’s largest grocer, Tesco, with $72bn annual revenue.
More recently it reported statutory revenue of £57.5bn for 2017/18, profit before tax of £1,298m and nine consecutive quarters of growth, putting the business on track to deliver its medium-term ambitions. Which makes Alan Stewart, Tesco’s chief financial officer since September 2014, a happy man. “To be able to play a part in Tesco’s turnaround, growing any business successfully, is something I will be able to think I’ve spent my time wisely on,” he says.
The CFO of a listed business would naturally be feeling good about his company generating significant amounts of cash (£2,773m of retail operating cash flow), or reducing net debt by £1,104m. So it’s the word “turnaround” that’s meaningful here. Stewart joined the business amid the turmoil that followed revelations to the stock market in September 2014 that its profit forecast had been overstated by almost £250m.
Talk about a baptism of fire. Due to reporting restrictions surrounding a criminal trial of former executives, Stewart cannot comment on the scandal. But his day one in-tray would have included issues such as a collapse in the share price, a loss-making core UK business that was losing market share, negative free cashflow, £8.5bn of net debt and £21bn total indebtedness.
Reflecting on those early days he says: “In deciding to take the job I knew a turnaround was needed. That was pretty clear even as I was making the decision to join. Joining any new organisation is always intense, something which requires a lot of focus and energy. Joining in the particular circumstances I did was just more intense. The days become very long but decisions have to be made. Those decisions have to be made with even greater uncertainty than sometimes might be the case in a more stable environment. But that’s the role of senior leaders, to make decisions,” he says.
That statement says a lot about Stewart, and also explains why investors were reassured when his appointment was announced. His vast experience as CFO at M&S, FD of WH Smith and executive roles at HSBC and Thomas Cook stood him in good stead for what was required. Among other things, that meant cost-cutting. So often the cross the finance function must bear, he’s nevertheless clear about how to communicate “efficiencies” to employees.
“You have to be honest. About where the business is, how it sits in the market, what its finances are, and honesty helps people either learn something that they maybe didn’t know, because it wasn’t being communicated. Or, very often, it confirms what they already know but what they’ve not necessarily been told,” he says.
“That honesty creates an awareness and an environment where you can take really difficult decisions that can impact the individuals who are going through that change. Those who are losing jobs, for example, understand, and those who are left also understand. Being clear early on with as much time before decisions are made is helpful for people. But it’s a clarity of and honesty of communication that is important. It’s very easy to shy away from difficult conversations.”
Stewart says he learned from all of the chief execs at the companies he worked for prior to Tesco, as well as his own experience as CEO at Thomas Cook. “One of the reasons I’ve been happy and even at times active in doing different roles is because I genuinely value learning from seeing different people in different environments,” he explains.
“So whether it was Kate [Swann at WH Smith], or Dave [Lewis at Tesco], or Marc [Bolland at M&S] or any of the people I’ve worked with, you can always learn different things. The essence for me is focusing on what the business aims to do, focusing on customers, and combining that with a strong focus on the capital allocation and the returns for shareholders. Whoever the CEO is, good CEOs judged successful after they’ve left have those characteristics in common.”
He wasn’t always in retail. Stewart trained to be a chartered accountant with Deloitte in South Africa having decided one year into medicine training that it wasn’t for him. He recalls: “I was brought up in South Africa, Scottish parents, my father was a chartered accountant and was a senior partner in another of the firms. It was the time when the Big Eight were becoming more concentrated so it was an interesting time. I was interested in business, quite numerate, and accountancy gave me something that I thought would enable an international career. Growing up in South Africa in the 1960s and 1970s... that really drove me towards it.”
Because he had a British passport, a job in the UK made sense and he joined HSBC as an investment banker. Ever since, he says, he’s drawn upon what he learnt as an ACA to support a business. The technical nous has been particularly useful. “There is still a need for the technical, from the financial reporting perspective, and that balance has never gone away. The key elements of investment – appraisal, capital, cash – all of that has been there but the surprising thing, actually, is the degree to which the technical has been an important part of being a finance director,” he says.
Once in retail, he quickly realised the importance of the customer. “That connection with customers, with people, how you present a business, whether it’s travel or retail or clothing or food or stationery, that’s what has really interested me,” says Stewart.
It hasn’t always been big business, either. Asked whether he’s ever considered applying his skills to start up a business of his own, he reveals he tried it once. “When I left Thomas Cook I actually spent a couple of years working on a start-up – a business class airline, which ultimately I didn’t feel we had enough money for, so I didn’t carry on with it. My business partner carried on for another year and it became a business called Silverjet, which launched, and then failed spectacularly shortly after. I think conceptually it was great, and I was going to be CEO of that business, but the cautious part of me always wanted it to be sufficiently well financed. I’ve probably scratched that itch enough in terms of the start-up side,” he says with a smile.
Certainly Tesco is keeping him engaged and interested for now. The rapid change that technology has unleashed on business is actually nothing new, he says, it’s been a consistent part of his working life. “When I think back to technology throughout my career it’s been developing at a pretty rapid rate throughout. I remember when I saw my first Apple computer, in the early 1980s in Cape Town... technology has become more and more at the forefront of all of our lives. I think in the retail context the step change was probably the launch of smartphones, and realising how something that had become part of all our lives with desktop computers, or laptops, suddenly became an integral part of our everyday lives, all of the time.”
In retail, he adds, self-checkout has been a game changer. “People were very sceptical about it but they now have a huge fondness for it, in terms of how they shop,” he says.
Which gets back to understanding what customers want. Stewart is crystal clear on this: it’s “absolutely fundamental to business success”. The second element, he says, is then being able to give those customers what they want “at an economic return satisfactory to what you’re putting in, because that’s what the shareholders would expect. Being clear as to what customers value, compared with what you think they might value, is important.”
So what do they value? “They value quality, price, service and the way in which they are able to make that choice. So nothing has changed in retail from the day I started! And probably from 200 years ago in that sense. Ultimately those are the choices they make and you can get into a lot below that, but that’s what they’re choosing.”
And let’s not forget the investors, who aren’t so unrelenting about return on investment. Stewart is a member of the CFO leadership network of A4S, the Prince’s Accounting for Sustainability Project, which was established by HRH The Prince of Wales in 2004 “to help ensure that we are not battling to meet 21st century challenges with, at best, 20th century decision making and reporting systems”.
On the intricacies of presenting to market, Stewart says: “Investors are fundamentally concerned with the returns they will get from their investment. But different investors will focus on different elements and in that sense you do need to understand what is the question any particular investor will have. All of that has to be done with a clarity of strategy and sensitivity and honesty about where you are in delivering that strategy.”
He continues: “A large number of investors are genuinely interested in long-term sustainable businesses. The important thing is to make sustainability – whether it’s environmental, people, or any other aspect of the long-term health of the business – a core part of what you do rather than having it outside. Key to the A4S CFO network is the fact that the sustainability of the business is within the business rather than sitting separately outside it. Increasingly, I think, some of the elements of what has been seen as a sustainability agenda item are being seen as a key part of the business itself. In the case of us, the sourcing of food, the impact of climate on food, or supply conditions on the food we’re buying has to be part of what we do in our business. The more we can bring those together, the better understanding there will be that these things are linked. And sometimes they’re not even two sides of a coin, they’re the same sides of a coin.”
Stewart has come a long way in four years. It was incumbent on him to make changes after the accounting scandal, which he did, to “the clarity of the functional reporting” and to the lines of communication “right up to me as CFO of the business.” The other element, he adds, which was true for every element of the company “was that we took Tesco back to the purpose, which is serving our customers a little better every day. That reconnection with the customer has been an important part of the last four years.”
It’s clearly working. As Dave Lewis said in April: “Tesco is growing again, recovering profitability and generating significant cash.” It recently announced a partnership with Carrefour, Europe’s largest retailer, to attempt to secure better deals from multinationals such as Nestle and Unilever. It feels good, confirms Stewart. “All the credit is down to our colleagues in store, who are absolutely facing customers every single day. Four years in, the turnaround is not complete but we’ve delivered each year what we’ve set out to deliver, and we feel that we’re on track.”
Alan Stewart was a keynote speaker at ICAEW’s CFO Conference: The Transformational Leader on 23 November 2018.
Originally published in Economia on 3 October 2018