Imagine taking over the reins of a firm which only a few years ago was regarded as one of the best run companies in the UK, but now routinely posted declining market share, moribund profits, and mounting negative coverage in the press. Once there were television shows joking about your firm declaring war and taking over Denmark. Today, the company look less like a world beater and more world weary. Your business model looks increasingly out of date. And to add insult to injury, your predecessor tried to turn around the fortunes of this great company by offering Zumba classes.
This is the situation which Dave Lewis will face as he takes over as CEO of Tesco. The retailer remains one the largest companies in the UK, with 6,784 stores and 597,784 employees. It controls 28.8% of the UK retail food market. It also operates in banking, mobile phones, insurance and many other areas. Many thousands of suppliers throughout the UK and beyond rely on the stores as an outlet for their goods. It continues to make a sizeable profit.
What is the problem you might ask? Well, Tesco has warned investors that instead of an expected £2.8 billion profit, it would “only” make £2.4 billion while the dividend is cut by 75%. Nearly 8% was wiped off the value of Tesco’s shares when markets opened. They later recovered to a more respectable 4% loss but this still meant the shares were back to 2003 levels.
A victim of inequality
But it wasn’t just this profit warning that rankled with investors. Rather, this is just the latest bad news for the company. Alongside declining market share, the firm has recently seen its CEO pushed out after only a few years, a slew of negative comments in the business press, and a widespread sense that something drastic needs to be done.
Underlying all this complaining are some deeper problems. There is the increasing cost of basic commodities such as food around the planet. Tesco’s growth has been premised on the long run decline in food prices around the world as mechanisation has made food more plentiful and cheaper. However, in the past years, there has been a long-run increase in food prices as globe demand out-strips supply, innovations in food production don’t match increasing demands and global warming takes it toll.
Another fundamental problem facing Tesco is its reliance on a large middle-class. The model of supermarkets emerged following World War Two with the expanding middle class which had more free income to spend on food and other items which went beyond the basics. Today, we see this middle class who has shopped at Tesco (and other supermarkets) for generations slowly but surely declining. The disappearance of relatively safe jobs and increasing costs of living mean that many struggle to get by. Those supermarkets which serve the extreme ends of the spectrum (Aldi and Lidl and their struggling consumers, and Waitrose with their wealthier consumers) are doing well. Those stuck with the increasingly desperate middle class find themselves also increasingly desparate.
The third fundamental problem is that what Tesco trades in has become one of the great battle-grounds of contemporary life. The British were once famously indifferent to food; they would even take pride in enduring the excessively disgusting fare served up across the nation. Today, we have seen a sea-change where food has become one of the benchmark topics of cultural life – alongside exercise, and maybe the diets and exercise regimes of celebrities.
It is no particular surprise that a minor kerfuffle over a baked Alaska on television baking show became national headline news. This should be good news for supermarkets – presumably they could become temples for induldging this new-found gastro-sprituality. Unfortunately this is not the case.
With the rise of what Steven Poole calls Foodism, we see supermarkets becoming one of the most important ideological battle grounds of our age. They are constantly monitored by activists, governments as well as food obsessed consumers. They become the focus of constant public debate and scandal. What this could mean in the forseeable future is that supermarkets will become as important a regulatory target as banks are today. The result for companies like Tesco is that they may spend as long trying to avoid scandals as they do serving their customers.
The final fundamental problem which Tesco faces is that its basic business model is declining. It has invested heavily in bricks and mortar and is in many ways a real-estate company which is excellent at identifying new retail sites, getting access from councils, developing them, and then renting space out to others. One big income stream for the company is renting out shelf-space to companies which produce food-stuffs. While this model worked well for Tesco, customers had to pay with the awful and alienating experience of the weekly supermarket shop.
Suppliers had to pay the increasingly high prices to have their goods actually on the shelf. Now this model seems to be breaking down in two ways. Budget retailers like Aldi and Lidl spend less effort on renting out shelf-space and more driving a hard bargain with suppliers once a year. And the rise of online shopping means increasing numbers of consumers are staying home and having their shopping delivered. This makes large stores increasingly useful only for elderly consumers who have nothing else to do but make a visit to the local Tesco.
These are not just run-of-the-mill problems which can be solved with a bit of sustained intellectual effort. They are what political scientists call wicked-problems: those that are difficult or impossible to solve due to incomplete, contradictory or changing requirements; deep interconnection with other issues; and a lack of a template for solving them. Wicked problems tend to be hard to contain or even understand. It is impossible to know which levers to pull, because pulling one will often solve the problem in one place, but create new problems in another. Classic examples include global warming, conflict in the Middle East, or transport planning in a city like London.
Over to you, Lewis
Any attempts to solve Tesco’s problems are likely to create others; there are no obvious solutions. Think for instance of dealing with rising global food prices: you could increase prices to increase profits, but this is likely to drive consumers away which would decrease market share and profits. Selling off stores to make a more whole-hearted move online could future-proof your business, but this is likely to be costly and you are likely to lose customers. These are the kind of almost impossible trade-offs which Dave Lewis now faces.
His first step is perhaps to stop seeing them as tame problems – they cannot be fixed easily using established templates. What is needed are novel solutions which will take some time to work through. The second is to stop trying to fix things with one-off, big-bang solutions that are likely to be a disaster. What is often called for by wicked problems is incremental experimentation and adaptation. Good enough solutions are likely to emerge in a bottom-up fashion. The third step is to provide some direction which puts a lid on workers’ anxieties.
When facing wicked problems, good leaders provide incisive and insightful ways for understanding the problems the organisation faces. They can also offer assurance that they have the confidence and capacity to find solutions which will work. But perhaps most important, they are able to provide their people with the protection and space which is needed to actually deal with the wicked problems at hand one step at a time.