Supermarket success

Managing a chain of supermarkets is not a game for the faint-hearted. With massive inventories and miles of shelf space, logistics is just one of the tough challenges they face. Worse, competitive battles with other supermarkets cause profit pressure as customers are tempted away by lower prices, superior products and a smoother shopping experience.

Two chains that I know stand out: Wal-Mart in the USA and Tesco in the UK.

Wal-Mart grew by avoiding city competition, spreading out-of-town superstores across the country that wiped out the local Mom'n'Pop stores on almost every count. Coupled with smart, computerized logistics systems, they drove down transaction and transfer costs that led to lower prices and higher profits.

After encircling towns in a death grip, they marched, unstoppably into remaining spaces. Nowadays, they are expanding overseas: in the UK they bought out the successful Asda chain.

All this was helped by the hapless K-Mart, their main competitor who did everything wrong just as Wal-Mart did everything right.

In the UK, Tesco has steadily been seeing off local competition. A few years ago it overtook Sainsbury's as the largest grocer and nowadays is way ahead. Overseas, they have an interesting strategy, entering markets such as Hungary, where there is negligible local competition (thus reflecting Wal-Mart's early strategy).

I went to a presentation once by Tesco's quality director, where I asked him about the real secret of their success. He started out by rambling on about quality systems, but I knew it was something deeper, and maybe simpler, than that and so I asked the question again.

It turned out that the most fundamental reason for Tesco's consistent success is that it is a meritocracy. Whereas most companies select their managers based on qualifications, who you know or external experience, promotion in Tesco is based almost solely on proven competency. I've since confirmed this with people who work there.

Even CEO Terry Leahy started at the bottom.

Imagine that: a company staffed with managers who really know how the business works and who fire on all cylinders most of the time! And ground-floor employees are powerfully motivated by the knowledge that their career is limited solely by their own abilities.

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