This week saw the announcement that Tesco’s £500m ‘Price Drop’ gamble most definitely did not pay off. Low consumer confidence forced people away from the tills which led to the worst possible scenario for a firm – undercutting prices with decreasing sales volume.
Investors showed nervousness too – following a drop of 2.3% in like-for-like sales (excluding petrol and VAT), shares fell by around 14% wiping over £4bn off Tesco’s value.
But the uncertainty investors showed is a product of two things: 1. structural problems within the business and; 2. short-termist investors.
Philip Clarke, the Chief Executive of Tesco, cited a strategic mistake in not matching the discount coupons that were being offered by its main rivals in the run-up to Christmas as well as the general economic difficulties from both home and abroad.
But more telling was his admission that, domestically, Tesco had underinvested in staff, service and quality of ‘shopping experience’ all of which made very quick short term profits, allowed for rapid (global) expansion and drew in large flows of short-term investment.
Ironically, Tesco’s drive for quick wins has been trumped by investors’ desire for even quicker results.
If Clarke will invest in these deficient areas will it take the form of having more staff or happier staff? A larger staff requirement will certainly create more jobs but service is, in part, linked to self-worth – a factor which is compounded by wage inequality. In 2009, Tesco’s then-boss, Sir Terry Leahy, was paid more than 900 times as much as Tesco’s average worker.
But whether investors will appreciate this further investment is another matter.
Fundamentally, however, Tesco’s results reflect the nature of the UK economy more widely. On such a scale we see businesses driving down prices often at a detriment to staff’s wages, inequality between the richest 10% and the poorest 10% reach around 14:1 in the UK (Germany 6:1, Denmark 10:1), investors disincentivised to commit capital over a longer time period and lack of confidence and trust, to name a few.
What can be done?
Ed Miliband provided a re-launch of Labour’s economic statement of intent in a speech in London this week. Everything that the recent Tesco result highlights about the UK economy he wants to change.
His answer? Be more like Germany.
Combating rising income inequality will go some way to developing a more responsible capitalism. Incentivising long term investment over quick short term profits will provide businesses and the economy with a better base from which to sustainably grow.
Furthermore, a financial system which looks to regional growth by providing the necessary capital, expertise and local empowerment rather than redistributive capital flows fromLondon will incentivise investment over financial sector returns.
The skills agenda is not ignored either. A greater collaborative approach by business leaders and schools will both provide the key skills the future workforce will need as well as ensuring key links to businesses will create stable and legitimate apprenticeship opportunities.
Whilst commentators have been quick to jump on Ed’s delivery, not only have they failed to recognise how significant his speech is in changing how the UK economy would look but also how interlinked these stories are.
Clearly the stage has been set for the UK to develop its own versions of these institutions we have never had.
If we want to avoid what the Tesco result highlights then perhaps we should change how we want the economy to work.