Calling Tesco: all you need is love

We shop there, yet we say we don't like it. Abigail Townsend asks if the chain should care and looks at the changes that could earn affection as well as money

The irony of it cannot have escaped Sir Terry Leahy, Tesco's chief executive and the man behind some of the most phenomenal growth the retail sector has ever witnessed. Just weeks after the supermarket giant unveiled record profits of more than £2bn to an appreciative City, and independent research confirmed its popularity with a market share of nearly 30 per cent, the rumblings of discontent started.

The irony of it cannot have escaped Sir Terry Leahy, Tesco's chief executive and the man behind some of the most phenomenal growth the retail sector has ever witnessed. Just weeks after the supermarket giant unveiled record profits of more than £2bn to an appreciative City, and independent research confirmed its popularity with a market share of nearly 30 per cent, the rumblings of discontent started.

Tesco is everywhere, the critics complained. Unfavourable terms are forced on suppliers. High streets are turning into clones, each replete with the ubiquitous red and blue logo. Competitors and small businesses are being squeezed.

The New Economics Foundation think tank - which has links to the Treasury - then announced that, far from being hailed as a homegrown success, Tesco should be broken up. Even parts of the City have found something to moan about. Pirc, the corporate governance group, is recommending that shareholders oppose the remuneration report at this week's annual general meeting in a row over bonus payments.

The AGM is also likely to reveal yet more solid trading - meaning that the debate about Tesco steamrollering through the high street is unlikely to go away any time soon. Sir Terry, it would seem, just can't win.

"Would people ban Beethoven because his music got too good?" argues Richard Hyman, the chairman of retail research firm Verdict. "It's just nonsense.

"Tesco is a terrific company. Does it abuse its size? It certainly flexes its muscles, there's no question about that. But one of the major beneficiaries is the customer. It's about striking a balance between minimising costs and ensuring the quality and continuity of supply that is absolutely crucial.

"Most people tread on a few toes from time to time. But in the round, is [Tesco] good for the public or bad? I have no doubt that it is a positive force."

Yet while Tesco still has its fans, it does get people's backs up, even if they're not entirely sure why.

"My neighbour announced the other day that she couldn't stand Tesco," says one retail expert. "I asked her whether it was the opening hours she didn't like, or the prices or range. She said no. And when I asked what it was then that she didn't like, she was stuck for words. But she still doesn't like it."

The chain is adamant that as long as it delivers the products customers want at the right price, a full-scale backlash won't materialise. But the retail expert, who has worked with Tesco in the past and asks not to be named, says it should be doing certain things to head off future criticism.

"It needs to start with the smaller formats and be more attuned to the local market, community and architecture," he argues. "The branding works really well in superstores but it doesn't break down. It's a bit crude and too obvious. When they opened an Express in our village, I thought 'bloody hell, I don't want that'. I like the offer, the fact it's open from 7am until late and that I can now get cash in our tiny village. But I don't like the really crude manifestation of their brand."

Even after the AGM, the spotlight will remain on Tesco as its market share grows. The next figures, due on 29 June, from the respected TNS Superpanel, which already has the group's market share at 29.9 per cent, are expected to show that it has smashed past the 30 per cent level. The Office of Fair Trading looks at any deal giving an operator 25 per cent of a market but not - unless there are concerns about a dominant position being abused - if that level is achieved through organic growth.

Jonathan Pitkänen, a retail director at credit agency Fitch, expects Tesco to develop noticeably different logos and branding for its various formats. This would allow shops to be seen as local outfits first and a Tesco second. He also argues that the group needs to continue its overseas push, where its market share is relatively tiny, and source regional food. "People want a supermarket but also want a Saturday farmers' market when they get there."

Paradoxically - although perhaps not surprisingly in such an ironic tale - one thing helping Tesco will be the consumer spending less. "We're going to have an eventual slowdown in sales," says Mr Pitkänen. "It's almost impossible to keep [current growth levels] up. And that will help, enabling Tesco to say: 'But look at our sales - it clearly shows that we're not stealing market share.' " The AGM is likely to show growth easing slightly, though still massively outperforming the sector.

At the moment, for all the chattering classes' gripes, the reality is that shoppers flock to the stores, and in such a competitive and crowded market, few could claim it is the only option.

Tesco customers apparently like what they're getting - be it convenience, cheap and cheerful clothes or the Finest foods range. Society too has changed: one argument runs that the reason there are fewer local independent stores is because demand for such shops, when people are constantly in a hurry, is on the wane. And with the retailer contributing millions to the economy, the Government is unlikely to want to rock the boat.

But should Tesco deviate from that path, that's when the trouble will really start. Clive Black, a retail analyst at Shore Capital, sums it up: "Tesco is good at want it does. No organisation is perfect, but as long as it remains customer-oriented and good value, then it's pretty hard to regulate and control. But the day it starts ripping people off, all that will change."

FROM JACK TO KING: THE HISTORY OF A HIGH-STREET SUPERPOWER

* Founded in 1919 by Jack Cohen, who used the money he got when he left the Army to set up a grocery stall in London's East End.

* The name Tesco was first used in 1924 when Cohen launched Tesco Tea, created out of tea supplier TE Stockwell's initials and the start of Cohen's surname

* The first store opened in 1932, in Edgware, Middlesex. But it was in 1947 that Cohen opened the famous "pile it high, sell it cheap" shop.

* The first foray overseas was to Ireland, in 1979, but most overseas expansion has occurred in the past decade.

* Tesco now has 51.8 million sq ft of selling space in 2,365 stores in the UK, China, Czech Republic, Hungary, India, Ireland, Japan, Malaysia, Poland, Slovakia, South Korea, Taiwan, Thailand and Turkey. It employs 367,000 people.

* Nearly 80 per cent of sales come from the UK, where it has 1,800 stores. Around £1 of every £8 spent goes into Tesco's tills and its market share was most recently put at 29.9 per cent.

* Tesco launched its financial services arm in 1997, the same year in which Terry Leahy was made chief executive.

* In 2003, it made a big inroad into the convenience market with the £519m acquisition of T&S.

* It has now four established UK formats: Tesco Express, a convenience store serving local neighbourhoods; Tesco Metro, small shops in busy urban centres; Tesco Superstore; and Tesco Extra, which carries the widest range of non-food products.

* Dedicated non-food stores, called Tesco Homeplus, will open in October in Aberdeen and Manchester under a trial scheme.

* Tesco, which has a market value of £24.4bn, still operates 300 of the 800 One Stop stores it acquired from T&S.

* Its largest store is the 100,943 sq ft Tesco Extra in Coventry; the smallest is off Parliament Square, Westminster, at 1,000 sq ft.