Picture the scene: a warehouse on the edge of Los Angeles. Inside is a small
Tesco convenience store, and each day it offers a different layout and contents.
Customers wander around deciding what to buy - watched keenly by note-takers.
A scene from a Kubrick film, perhaps, or some kind of dystopian future? No,
it’s how Tesco is doing its homework before venturing into a new territory.
Global expansion is no mere lucky accident. Everything is analysed, considered,
pondered and planned.
To date, Tesco operates 2,000 stores across the globe, and enjoys sales
figures that continue to confound the analysts. Full-year results for February
2006 rocketed to £39bn - up 16.5% on the previous year’s figures.
Net profit margins for the group run at 4% - much higher than its rivals -
while market share in the UK has increased to more than 30%. Only Sainsbury’s
increased its share significantly, following a healthy 18 months.
Such attention to detail, as with the Los Angeles test stores, goes part-way
to explaining the retail giant’s run of success in the UK market. Yet analysts
believe UK competition could finally be regaining its strength.
So Tesco finance and strategy director Andrew Higginson sets to work again.
Or he would. First he dropped into the Accountancy Age offices to talk and
accept our 2006 award for Outstanding Industry Contribution. Since joining the
company in 1997 his strategic flair has been a huge influence on the
decision-making of chief executive Sir Terry Leahy, and the two men are
essentially treated as a pair in terms of the brains behind Tesco’s incredible
expansion, which includes successful moves into non-food, financial services and
its international reach.
It goes almost without say that Higginson was put in charge of leading the
team that is leading Tesco’s efforts to crack the US. ‘Everywhere you turn over
there, there is retail. We’ve had an idea based around our Express stores, and
the board decided to give it a go. We lived with US customers, looked in their
fridges and examined how they shopped, it was a ten-month project to test
behaviours.’ And so begins a new chapter in the Tesco story. This particular
chapter is going to cost the company some £250m in investment, a considerable
sum even for Tesco.
Because it’s such a big gamble to go up against businesses such as Wal-Mart
in its own territory, Tesco has invested huge amounts of resources in the
effort. ‘We’ve sent a top team out there. Tim Mason is a hugely experienced
regional director and buyer,’ says Higginson.
Nothing to fear
Higginson, one of the UK’s leading FDs, is no fool to the risk, though, and
isn’t afraid to admit defeat if necessary. ‘Of course, there is a balance of
risk to reward. If it’s a roaring success you throw more at it; if it’s a
complete disaster, we’ll retrench quickly.’
Still, Higginson expects something in between those two scenarios. But he has
a timescale if it goes wrong. ‘Three or four years, which could cost us up to
£1bn. That’s a lot of money, but we can sustain that.’
With funding coming from head office, Higginson remains vital to the project,
and will be an important board member in laying US strategy. Developing
strategies is something Higginson could well claim to excel in.
He became Tesco group FD in 1997 when he left the Burton Group. Higginson has
been instrumental in developing the company, alongside Sir Terry. Higginson
epitomises the modern day FD and is a perfect representation of how the role has
evolved to embrace the commercial side of business as well as the numbers.
‘Starting from my Unilever days, this commercial approach to being an FD was
crucial. You need to be able to do the basics, but the more senior you get, you
have to develop the management skills to delegate, how to ask the right
questions and dive into the detail every now and again.’
Higginson says that as Tesco has grown, it has had to deal increasingly with
commercial issues such as reputational risk. The supermarket was found to have
paid only 67% of small suppliers within agreed terms, on invoices under £5,000.
The issue is particularly relevant with the Competition Commission undertaking
an ongoing review into the behaviour and power of the UK’s biggest retailers.
Higginson is upfront about the issue, but nevertheless dismisses the
findings, albeit with a qualification. ‘It is the last thing that should be
happening, but I don’t believe it is anyway. I am happy that is not the case
with Tesco,’ he says.
‘We have electronic payments to suppliers, so I don’t see that as the case.
Big companies have an obligation to pay small suppliers to make sure their
cashflow is OK.’
The FD is keen to tackle all the pressing issues of the day. An example of
this is the company’s pension scheme. While many large companies have ended
their final salary schemes, Tesco has set up an attractive benefits pension
scheme. Higginson was instrumental in setting it up and is based on member’s
average earnings rather than final earnings, with no plans to change its pension
policy to a contributory option.
Indeed, pensions accounting is a subject on which Higginson is vocal.
Accounting for pensions, he argues, is a sign of rules being incorporated to
replace the UK’s cherished principles-based approach.
Tesco’s scheme is young, explains Higginson, and has plenty of time to match
its assets and liabilities where, for example, the Coal Board literally has no
staff, but is full of pensioners requiring a totally different investment
Under pensions accounting rule IAS 19, both businesses must present the
figures under the same rules. So Tesco has introduced an underlying profit
figure, which takes the effect of IAS19, IAS32 and IAS39 out of the equation.
Current pensions deficit for August 2006 is a cool £1.2bn.
‘That’s the problem with rules-based approaches the one-size-fits-all
mentality isn’t always appropriate. So I hope there’ll always be a sensible
interpretation when it comes to accounting. Taking a sensible view has always
been an important part of the UK profession.’
The prescriptive requirements of Sarbanes-Oxley and US Securities and
Exchange Commission filings seems to be one of the reasons why Tesco will not
seek a US listing for its new business. Higginson says this won’t put off US
investors. They simply invest in the company as part of their international
portfolio, so there’s no need for a US listing ‘at the moment’.
Where rules have been implemented to put the onus on non-executive directors
to spot mistakes or problems, Higginson has issues. As a non-executive for BSkyB
(he is rushing to the company’s board meeting after the interview), and as a
potential serial non-executive in the future, he views the idea of
non-executives as policemen of the board as ‘flawed’.
‘They can do a lot to ask the right questions and reassure themselves that
the proper controls are in place, but they have to look the management in the
eye and judge the character of the executives and if they’re really running the
business properly. But if Robert Maxwell were around today, he’d probably still
nick the pension money because he was a crook. It’s difficult to legislate for.’
For the moment Higginson continues to focus on his day job. He is happy to
have ‘survived’ for nine years and continues to thrive. He is responsible for
Tesco.com, which posted interim profits up 43%, while personal finance profits
hit £50m. As well as responsibility for its telecoms business, there’s no sign
of a chief executive role or half a dozen non-executive positions not yet
Off you go
Tesco, one of the biggest retailers in the world, is not your usual business.
And for its finance director, Andrew Higginson, managing the group’s accounts is
a massive task, so the structure of the company’s finance function is vital.
Tesco is divided up by business line and each operation has its own FD.
One of the most important links between Higginson and the countries in which
Tesco operates is international FD Liz Doherty, touted by executive recruitment
experts as a future FTSE 100 FD. ‘She’s first-rate,’ says Higginson.
Dealing with credit control, invoice payables, and everything else expected
of a finance function involves 2,000 people, including IT. This is a team based
in Bangalore. The function was moved from Cardiff, where call centre operations
are now based. The shift abroad began two years ago.
However, Tesco has not followed the typical offshore route and the staff
remain direct employees. ‘We look for synergies where we can,’ Higginson says of
the decision. ‘We have to consider these strategies, but it doesn’t leave a lot
of room if you get things wrong.’