CBI Conference speech by Dave Lewis

9 Nov 2015

CHECK AGAINST DELIVERY - Dave Lewis' speech at the CBI Conference 2015

CHECK AGAINST DELIVERY

Before I begin, I would like to pay tribute to John Cridland for his 33 years of service to the CBI.

Given that the CBI is celebrating its 50th birthday this year that means that John has been contributing to the organisation for nearly 70% of its entire existence. A remarkable contribution and one for which we should all be very grateful.

The fact that in the eyes of many investors and business leaders around the world “Britain does mean business” is a tribute to John’s work. 

So thank you John – and also the best of luck to Carolyn as she moves into the hotseat, and to Paul as he starts as CBI President…

Now to serving Britain’s shoppers.

As you will no doubt be aware I am a new boy to retailing. Just over a year in and it’s been quite a year. Some have even called it a baptism of fire and there may be some truth in that.

What is true is that I join the industry at a very challenging time. Industry profitability has dropped significantly, and we are running through an unprecedented period of Food Deflation. Great news for customers but hard for a business trying to generate funds to invest and restore profitability.

So in the next 13 minutes what I want to do is share 3 things:

  • Share with you my insights into the retail industry.
  • Share with you just some of the challenges we face.
  • And finally share with you a little about what we think we need to do in order to respond to these challenges.

 

THIS IS A REMARKABLE INDUSTRY

Let me share a few facts:

  • We contribute over 5% of GDP.
  • We employ 3 million people.
  • Nearly 10% of the whole workforce is in retailing in one way or another.

So little wonder that we have been referred to as a nation of shopkeepers.

  • Within those figures, supermarkets alone employ 1m people.
  • With a further 900,000 in our supply chains.

Tesco alone employs around 310,000 here in the UK.

  • 54% of them women.  
  • 70% in flexible employment.

And every year as an industry we pay somewhere in the region of £28bn in tax.

So it’s big – I think we all knew that – but what I didn’t appreciate was its contribution in other ways:

Social mobility….

  • Supermarket retailing helps rebalance the economy away from its epicentre.
  • 69% of stores and 72% of sales are outside the SE and London.
  • It’s more evenly spread geographically than financial services or manufacturing.

Training and development.…

  • 42% of 16/17 year olds work in retail. It’s a valuable first experience of working life.
  • Around 15% of all apprenticeships are in retail.
  • What’s more, each year the industry invests around 15 hundred pounds in training and developing every one of those people employed in the sector. The industry makes an important contribution to providing skills and development for a large portion of the active work force.

Community….

  • The industry contributes at every level…
  • At Tesco, we donate around 4% of pre-tax profits to charity.
  • We’ve provided 27.5 million meals to people in need.
  • And we have community projects in virtually every large store.
  • All proceeds from the Bag Charge – around £30 million – will go to local charities.
  • Whilst nationally we continue to support Diabetes UK and the British Heart Foundation through our National Charity Partnership, and Cancer Research through our sponsorship of Race for Life.

 

THE CHALLENGES WE FACE

Some of these are well documented:

1. The growth of digital.

Next year the global internet economy will be worth $4.2trillion. Delivering a revolution in connectivity, data sharing and analytics. 

Increasingly the world is mobile first. 

  • Major online retailers report more than half of their UK transactions are completed on a smart device.
  • In the UK, digital retailing has doubled over the last five years to become a £10bn business.

As a business, we expect continued growth…the challenge for us is how to make our online business of tomorrow as profitable as our offline business yesterday.

But as a nation there are significant challenges too.

Digital operations have no real community footprint…far fewer employees…and a far lower tax contribution.

That should be a dilemma for the Exchequer. Without rebalancing to reflect digital business models the physical side of retail pays a higher and higher proportion of the total tax bill. 

Furthermore it will incentivise a swifter shift to infrastructure light, low employment business with little interaction with communities.

 

2. Back in the physical world, the growth of limited range retailers and a growth in convenience shopping have both affected profitability and growth.

  • Limited range retailers have doubled since 2010.
  • That’s now a 13 billion pound market opportunity.

Shopper habits have changed during recession. Basket sizes have reduced.  Weekly shops have split into multiple shopping occasions.

  • The convenience channel is therefore growing; it’s up 5% again this year.
  • Our big stores are also seeing a high proportion of convenience shopping trips – 76% of Tesco convenience trips take place in our Extras or Superstores.

But I don’t see this as a challenge per se – I see it as a shift in what customers want or need – and it’s our job to respond.   

What I do see as a challenge is that whilst the customer was heading in one direction the industry was heading in the other…between 2007 and 2014 it added around 35msq ft…

The market didn’t grow. Inevitably it couldn’t go on…and in January this year we called a halt.

It was painful – colleagues and communities were affected as we closed stores and decided to halt construction on others. I suspect however that our competitors were relieved…because their announcements followed in pretty short order.

But it isn’t just the big 4.

More independent shops were closed than opened in the first six months of this year.

As the first CEO in Tesco’s history to be criticised for not opening a shop or for closing some existing stores I can tell you that this trend you are seeing is no longer down to us.

 

3. Which brings me on to the real challenge for our industry…the addition of more structural cost at a time of historically low profitability.

I’ve spoken already about Deflation.

  • Two years ago food inflation was running at 4%.
  • Now it’s minus 2.4%.
  • Great news for the customer but definitely a very significant pressure in parts of the retail industry.

In supermarkets profitability has sunk from 5% to 2% in five years and now we face significant new cost pressure.

This is a potentially lethal cocktail…

Business rates

It’s complex - only the most dogged commentators follow it. But let me spell out the simple truth:

  • Over last five years property values have fallen, profits are down but business rates are up. Quietly but dramatically.
  • Business rates have hit £8bn for retail. That’s over a quarter of the bill and significantly more than any other sector.
  • That’s an enormous pressure. Shops have closed. Businesses lost. Jobs sacrificed.

Our own business rates bill has increased by well over 35% in the last 5 years. It’s the biggest tax we pay and it is now three times OECD average.

For every £1 we pay in corporation tax large UK retailers pay £2.31 in rates.

It’s unsustainable and needs urgent reform.

No doubt you’re all familiar with the National Living Wage.

Now the debate around pay is really important – our colleagues are the greatest asset we have. Their quality, unrelenting commitment and passion for doing the right thing are at the heart of our business turnaround.

Notwithstanding the challenge we face this year, at Tesco we have a good history of paying well - and we were supportive of the Living Wage when it was announced. Our pay and benefits package is already significantly above the new voluntary Living Wage rate. 

If you monetise benefits – for the sake of argument, for our colleagues outside London – we are already at £8.80 today.

Our concern, and the concern of many colleagues, is that there is pressure to increase base pay at the expense of benefits. We don’t think this is the answer.

We shouldn’t simply strip down employment to an hourly rate or draw arbitrary lines. It’s more complex than that. Benefits are hugely important to our colleagues. Valuable too. Our workforce is not homogenous.

Our colleagues say they value different things at different stages in their lives and at Tesco this is what we are trying to accommodate.

We need a fuller debate aimed at doing the right thing for the people in our industry without imposing more cost without providing individual benefit or business return.

At Tesco, we’re working on a menu of benefits which gives colleagues flexibility of choice and support which they value – including a competitive pension scheme, a 5% turnaround bonus, colleague discount, plus the opportunity to invest in the business through Save as You Earn.

And as an industry there is a worry that the unintended consequences of the living wage have not been fully thought through.

 

HOW SHOULD WE RESPOND

At Tesco, we face these industry problems and some others of our own making. When challenged by this economic reality, we inflicted damage on our business in pursuit of maintaining a level of profitability which was unsustainable given the environment in which we were operating.

What have we done is we have tried to take stock, to consult with key stakeholders openly, to use our ears not our mouths, we have sought to seek collaboration in addressing the challenges and opportunities that we face and we are looking to co-operate with partners as we chart our course in the journey to turning our business around.

It’ll take time but we will build on collaboration. Finding common goals rather than imposing unilateral decisions.

And I suppose that is where I’d aspire to get to with Government.

I’d like to find a way to be constructive and open minded on all sides. Based on more consultation, collaboration and co-operation.

Getting this right has huge consequences for the retail industry but also for the wider economy, for social mobility, geographical balance, training and for employment more broadly.

I believe government needs to be careful and strategic on regulation and taxation. Recognising changing dynamics. Taking account of those new realities. Consulting to iron out unintended consequences. With the ultimate prize: more stable, sustainable growth and a better deal for taxpayers.

The challenges I described earlier create an opportunity and an imperative for Government and business….to share knowledge, innovation and risk in tackling some of the most pressing issues we face as a country…

…but it requires collaboration as well as tax collection.

I have always been an optimist, whilst there are significant challenges I also see real opportunities.

If we can meet in the middle ground…we can solve problems together.

We can forge partnerships which drive progress on health, training, skills. Create economic growth while protecting families and the communities where they live. Achieve sensible regulation…and a new balance of taxation and incentives.

But, if we can’t consult effectively…or find better ways of working together, I fear that it’s communities all over Britain that will suffer.

I’d like to see the retail industry and our business working closely with government on three things:

Firstly, I would encourage the industry and Government to sit down at the highest level and consult on the multiple policy changes that are affecting the industry, to share together the consequences of higher rates, the living wage and initiatives such as the apprenticeship levy. The British Retail Consortium is already attempting to do this but it takes two to tango.

 

Secondly, I’d like us to be able to innovate together on tough employment, skills and training challenges.

The opportunity for Government is to enable us to continue offering personal mobility through training, development and progression…we can do the heavy lifting from no skills to some skills.

To continue offering crucial flexibility to enable mums and older workers to return to work…in large numbers.

Let’s not constrain ourselves after a decade of progress creating 5000 jobs for the long term unemployed in locations from Corby to Woolwich through our Regeneration Partnership scheme. Or to choke the progress that created 9,500 apprenticeships between 2012 and 2014.

Employers like us can be innovators on tough agendas – sharing the burden of Government priorities.

But a balance has to be struck between allowing investment for growth and collecting taxes through mechanisms like the apprenticeship levy which wipes out the equivalent of our whole training budget.

 

The third area where I can see real potential for partnership and innovation is on health and food education.

We estimate that our work together on reducing salt has saved around 1,500 lives. Proof that when industry and government work together we can make a real difference.

Millions of Britain’s shoppers are weekly Tesco customers.  We have more than 40m transactions a week.

And when we reformulate, we can remove billions of calories from their shopping trips.

In soft drinks our action has removed sugar, we have re-organised aisles and increased low/no calorie options.  Four years on the average customer is now buying 20% less sugar in soft drinks.

This year we removed sweets, fizzy drinks and fried crisps from checkouts in smaller stores.   

This month the one millionth child embarked on a farm to fork trail to improve basic understanding of food.

  • That’s 179 farms and factories involved. 
  • 787 stores in 787 communities.

We make large scale contributions to heart health, cancer research and the fight against diabetes.

This year, as you can probably tell, we are also supporting Movember.

These are just some of our health initiatives. There are many more. As a founding signatory of the Public Health Responsibility Deal we have signed 27 pledges covering food, alcohol, physical activity and health at work. 

Direct action on agendas shared with government. Delivering outcomes that Government struggles to deliver. At scale.

I want to partner and innovate more on health. Not because I want to burnish Tesco’s image but because two thirds of supermarket shoppers want me to. Because it is about Tesco serving Britain’s shoppers a little better every day.

That’s why we want to be able to increase our social and economic contribution across employment, employability, training and skills development.

Because we believe it is good for colleagues, customers and the communities where they live.

That’s why we want to increase our social and economic contribution through health initiatives.

We are uniquely placed to nudge millions of people every week towards healthier choices.

Our customers want it and the government can benefit greatly from it… if we can meet in the middle ground.

Nurturing growth – social value alongside economic value – in an era of extraordinary change needs a new level of collaboration.

A new way:

  • With our colleagues inside the business.
  • With our suppliers.
  • Between business and Government.
  • Based on mutual benefit and shared risk - incentivised investment in ideas and action.
  • All within a re-balanced, growth-minded tax framework which is mindful of unintended consequences…and actually reflects very real pressures on businesses right now as they navigate unprecedented change.

A new way of working for a rapidly changing world.

A new way to solve more of the problems people want us to solve, more quickly and at lower cost to taxpayers.

That’s good for business. Good for Government. And, given the wider economic importance of retail, good for people in Britain as a whole.

Thank you.