Retail and Distribution Management

The story behind Tesco's stamp decision: And the company's policy for the future
Ian Mac Laurin

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Ian Mac Laurin, (1977),"The story behind Tesco's stamp decision", Retail and Distribution Management, Vol. 5 Iss 6 pp. 29 31
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Ian Mac Laurin

Managing Director, Tesco Ltd

The story behind

Tesco's stamp decision

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and the company's

policy for the future
Tesco's decision in June to drop
trading stamps was not simply a
matter of promotional change, but an
essential element in the formulation of
the whole trading policy of the company. Three cardinal questions
demanded consideration: Tesco's own
position in the market; the short-term
prospects for the national economy;
and a long-term projection of Tesco
performance against future economic
developments. Ian MacLaurin delivered an extended version of what
appears on the following pages at a
recent conference organised by CapelCure Myers.
THOSE seven days in June were much
more than an instant response to existing market conditions. They represented a fundamental shift in the trading
philosophy of Tesco.
Clearly such a move does not take
place without a great deal of intensive,
even painful, thought. In 1972, when
we renewed our contract with Green
Shield for another five years, we were
operating in conditions in which stamp
trading was still a valid way of offering
customers a genuine and tangible
benefit. Inflation was at a reasonably
acceptable level, wage increases were
ensuring that most people were a little
better off each year and we all felt
reasonably prosperous.
By 1975 it was already evident that
conditions had changed the whole
retail trading pattern in fact was
changing and the general public was
becoming price-conscious in a way
that had not been apparent for many
years. These trends were intensified as
inflation roared away and wages began
to fall behind.
By the closing months of 1976
active discussion about our future in

stamp trading had extended beyond

the main boardroom and into my
meetings with our retail directors.
To be frank, these discussions were
tough. After all, we were not simply
discussing a 20m annual investment
in stamps but the whole trading policy
of the company; we were not simply
considering a short-term business ploy,
but rather a decision that would shape
Tesco performance into the 1980's.
The more we examined the
question, however, the more deeply
we became convinced that the public
trapped between reducing
disposable income and fast rising
prices would prefer the full value of
the pound in their pocket to the paper
incentive of stamps.
Inevitably and rightly our discussions were not just about keeping
or dropping stamps. But because the
stamps issue brought about such a
change in our trading policy, it
encouraged us to take a long and hard
look at ourselves and our future.
When we first took on Green Shield
in the mid-sixties Tesco had an
exciting, a vibrant, image. We were the
first into supermarketing. We were
among the first into stamps. We were
setting the pace for the retail future.
Sales growth too slow
But we are realists. We were well aware
that in the 1970's our sales growth was
too slow; we were equally aware that,
having been a pace-setter among growth
stocks in the equity market during the
1960's, we had underperformed in the
70's. And we were not satisfied with
our performance.
A recent study by St. David's University College highlights exactly what
I mean for, against a socio-economic
backcloth, it reveals that while the
traditional department store took half
a century to reach maturity and is now

in decline, the supermarket took less

than half this time to mature and the
'hypermarket' has come of age in
Europe in less than a decade.
It was just this flexibility of response, therefore, that was the feature
of our Board discussions between
1975 and 1977, for we realised, none
better, that the retail scene was continuing to change and that three
cardinal questions demanded consideration: in the first place, our own position in the market; in the second
place, the short-term prospects for the
national economy; and in the third
place, a long-term projection of Tesco
performance against future economic
developments.
The first of these, our "market
profile", was comparatively straightforward. Traditionally, Tesco was
regarded as a price-competitive group
trading largely at the lower-middle and
lower ends of the market. The
company, in short, was tough, extrovert and expansionist. Such an identikit
was superficial, however, for in the
past decade Tesco has been moving
away from its historic trading base,
dependent largely on smaller stores
concentrating on food, towards larger
units selling a mix of food and nonfood items.
Again, this evolutionary shift in our
trading policy was a calculated decision against our own reading of future
market trends. By the mid-sixties it
was clear that total food sales were
stabilising and diversification into nonfood lines was necessary.
We did not need economists to tell
us that at a certain level of disposable
income food sales peak out or even
drop; we did not need to be told that,
with increasing affluence, there would
be a shift away from convenience to
durable items. The evidence was there
for us to see in the shifting pattern of
29

merchandising

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returns from our stores throughout the

UK.
The need for space
Such a diversification programme,
however, demanded space. It was
impossible to meet our customers'
changing needs in stores of three or
four thousand square feet. The notion
is a contradiction in terms. It was for
these inter-related reasons to capitalise on evolving consumer trends that
we determined to concentrate our
efforts on developing larger units and,
at the same time, to reduce the
number of smaller stores.
The result of our policy, consistently pursued, has been the closure of
a number of smaller units and the
opening of larger ones. In the current
year alone 31 small units have been
closed to date; while in the past six
years we have opened 94 stores of
20,000 square feet or more and will
add another 600,000 square feet of
large-store space to our total sales
footage by the end of 1978.
This, I would emphasise, is not to
suggest that size will be the sole determinant of the retail future. On the
contrary, there will continue to be a
steady demand for smaller units,
especially from retailers trading in
specialised areas and from shoppers
demanding neighbourhood retailing.
This allowed, however, the post-war
trend in the industry has been towards
the application of economies of scale;
and it is interesting to recall that in the
case of Tesco our largest store in 1956
covered only 5,000 square feet. Today
units of ten times this size are
commonplace.
At present, Tesco are developing 11
units of more than 30,000 square feet
as part of our 45m development
programme for the next two years.
Thus, throughout the long debate
on stamps, we had a number of positive
factors working in our favour, the
chief among them being that, by anticipating trends in the mid and late
sixties, we had already established a
firm physical base which had not only
allowed us to diversify into non-foods
but also to introduce any policy shift
that we might think necessary. In
short the company was not trapped in
the past; it was strongly placed to
exploit the future.
Economic contrasts

The problem, of course, was the shape

30

that this future might take. A year

ago, remember, when we were heavily
debating the whole future of Tesco,
we were facing national economic
disaster, with the pound plummeting,
inflation at record levels, interest rates
through the roof and morale everywhere desperately low.
What a contrast this year, with the
Bank of England selling pounds to
keep the rate down, inflation and the
Retail Price Index falling, Minimum
Lending Rate at 6 per cent, and Mr
Healey forecasting a "generation of
steady expansion ahead".

The nightmares of the autumn of

'76 seem a long time ago and yet this
was the climate in which the discussions on our future trading policies
took place discussions at the very
eye of the economic storm and which
demanded both a short-term appraisal
of our prospects and a longer-term
view of our future against the backdrop of the national economy.
The exercise demanded nerve and
the conclusions we came to were twofold, though related:
Firstly, that unless we were careful,
Tesco could develop a somewhat
faceless image;

Secondly, that stamps had not just

lost their relevance for us in the
short-term when economic conditions were bad; they were not to
the benefit of the company's image
in the longer-term when the
economic picture had brightened.
It was on the basis of these conclusions that we decided that when our
five-year contract with Green Shield
ended in June 1977, stamps would
have to go. Once the decision was
taken, we spent many months formulating our strategy for June the Ninth
and what was to come after.
Today, we all know the success of

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merchandising
Operation Checkout. Six months ago
it was different. The run up to Jubilee
Week was, I suppose, one of the most
tense and crucial periods in the fiftyyear life of Tesco, for all our calculations, it was impossible to tell whether
our decision would pay off until we
tried it out. In the past months the
result of our calculated and this is
the operative word of our calculated
risk has been so well documented that
it requires little further comment.
Suffice to say that statistics produced by AGB Research show that we
have lifted our market share from 7.9
per cent to around 11.5 per cent,
where it appears to holding constant.
Even now, however, certain of our
competitors seem to think that
Checkout, and all it involves, is only a
flash in the retail pan; a kind of seven
day wonder that has spanned sixteen
weeks.
It is not. As I have said, the dropping of Green Shield is only symptomatic of the development of our new
trading policy in anticipation of the
emergence of a new trading environment in the 1980's.
There is a notion abroad, and it is
surprisingly widespread, that retailing
is one of the few permanent and unchanging fixtures in our lives.
Such a mental block can be suicidal,
for our life expectancy as businessmen
depends, increasingly, on recognising
the inevitability of change; on our
ability to relate our intuition as retailers to the highly technical skills of
market and trend analysis, of forecasting and forward planning. In short,
intuition is becoming a highly technical
matter! So much is easy to say; but
what are these trends which, on the
one hand, influenced Tesco in their
June decision, and on the other, will
shape the pattern of retailing over the
next decade?
External conditions

to the shape of the future, merely to

recognise the inescapable fact that the
retailer does not operate in isolation
from his social or economic or physical
environment. Quite the opposite, for
the shop is probably the most sensitive
indicator of the well-being of a community and you can read the 'state of
the nation' by what's to be found in
the housewife's shopping basket.
Given this, however, the question
remains to be pressed: if the stamp
decision was based on our reading of
the future, what sort of trading future
does Tesco anticipate? Here, mid-term
economic indicators are crucial and it
would seem to me that, having
bottomed-out of the depression of the
last three years, Britain's prospects
into the mid-1980's look extremely
encouraging; not solely because of
North Sea oil but also because both
management and unions seem to be
taking a far more realistic view of their
responsibilities in society.
It has been said that to expect good
news is to invite disaster; nonetheless,
if mid-term economic forecasts are
correct, they must have a significant
impact on retail performance. A little
earlier I touched on the first, hesitant
indications of a shift in the trend of
retail buying in the early and midsixties a shift towards the durable
end of the market. This development
is now reaching maturity in the United
States and confirms that as disposable
income rises food buying peaks out
and the surplus spending capacity is
directed first to the acquisition of
essential durables and then the more
luxurious items.
And as with the United States, so
with the United Kingdom, where food
expenditure has remained virtually
static for the past seven years (and
actually fell during the first six months
of 1977) whilst spending on footwear
and clothing, electrical and other
durables, has grown at a fast rate.

Obviously there can be no absolute

answers to such a question for, in the
end, the retail industry is not its own
master but subject to external conditions and forces over which it can
exercise no control. At global level, for
example, such factors as foodstuff and
energy resources demand consideration; at European level, the legislation
of Brussels and Strasbourg; at national
level, the decisions of Westminster and
Whitehall and local government.
This is not to evade the question as

We have been adapting to these trends

for some years, and have reached the
point where non-food sales contribute
more and more to our total turnover.
As the number of larger units continues
to increase, we are more and more
extending and improving the range of
merchandise, and moving into new
fields; for example we are now successfully running garden centres at some
of our superstores, while some have

Importance of non-food

garages attached.
What comes next? When the
demand for durables is satisfied, where
will the public then spend its surplus
cash? Finding the right answers to that
question will provide the key to
successful retailing into the mideighties; and even during what has
been called "the long winter of our
economy" there have been indications
of the way in which buying habits will
move towards the luxury and leisure
end of the market.
Eight years ago the government
published a major survey, 'Planning for
Leisure' in anticipation of what has
since come to be described as the
leisure revolution. It is a sadly neglected
document for even then it isolated an
emergent public demand for improved
recreational and leisure amenities. It is
my belief that this demand, fuelled by
higher earnings, will play a significant
role in shaping the pattern of retailing
in the years ahead.
But if this is my projection, what
form will retailing itself take? The evidence, I suggest, is there for all to see
in the emergence of new and sophisticated types of shop in many of our
town centres.
Small food shops will cease to be
operated by multiples, but I believe
they will be taken over and run by
private individuals 'mum and pop
stores' similar to those one sees in
America.
If these changes can take place
during the siege conditions of the past
three or four years, then I do not
believe that either central or local
government planners need have any
fears about the future prosperity of
town centres.
In parallel with this, neighbourhood
shops will also reflect the trend
towards the luxury end of the market,
whilst, to complete the structure,
there will be the large store, often
forming the nucleus of multi-purpose
district centres.
All three elements town centre,
district centre and neighbourhood
facilities are, I believe, complementary, each providing the shopping
public with the varied choice it
demands.
In fact, unless we can provide such
variety we will be depriving our
customers of what we are all about the freedom of choice to enjoy what I
hope will be a new-found prosperity
31