Clean-up on every Tesco aisle: where to start
Friday 29 August 2014
Dave Lewis becomes the first outsider to take on the mantel of Tesco chief executive on Monday where he must learn the business quickly, put in place the right team and start overhauling years of mistakes and misadventures conducted by his predecessors. But where to start?
Tesco is being outflanked on price by discounters Aldi and Lidl. A disastrous Big Price Drop campaign in 2011 quickly unravelled and lost the trust of many shoppers, while its current price cuts remain vague – the company is still unable to reveal exactly how many lines have been affected and how the cuts impact its profits. Mr Lewis needs to take urgent steps to make it clear to the City what its profit targets will be. A previous unsustainable promise of a 5.2 per cent profit margin led to former CFO Laurie McIlwee resigning and analysts yesterday suggested a more realistic target should be about 3 per cent.
JP Morgan analysts explained: “We believe that UK industry margins are too high relative to other European markets … and Tesco, in particular, has evolved its offer in a way that is intended to maximise profits. This would not be a problem if Aldi and Lidl did not exist.”
When Sir Terry Leahy left Tesco in 2011, several senior executives also cashed in their shares and headed for the exit. Some in the City suggest this meant his successor Phil Clarke was always doomed to failure. However, others are more cynical.
One industry source said: “The key players all left and Phil appeared to surround himself with yes-men, meaning no one would take him to task when things were going wrong. He was good COO material, but not a CEO.”
Several analysts suggested Mr Lewis needs to put a strong retail team into senior positions, with outside appointments needed and impressive internal executives, such as the highly rated London boss Andrew Yaxley, given bigger roles.
Mr Clarke was left with an almighty portfolio of “big-box” stores throughout the country, thanks to Sir Terry’s space race of the 1990s.
But shopping habits have changed and customers no longer make big weekly shops – preferring to buy online and top up at convenience stores.
Mr Clarke attempted to redress that by filling these 100,000 sq ft monsters with posh Harris & Hoole coffee shops and Giraffe restaurants. However, Mr Lewis may want to sell off these non-core assets and look at sublets with other retailers.
Overseas may only account for one-third of Tesco’s business, but it too is in need of some help, with every country it operates in seeing sales fall in recent years.
Mr Clarke wisely pulled out of the US and Japan. But shopping law changes are also hitting its South Korea business – one of its best.
With Asia performing far better than central Europe, Darren Shirley at Shore Capital suggested the company may look to float the Asian business in Hong Kong.
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