It is academic now on whose watch the Tesco crisis began. Were the seeds sown before Sir Terry Leahy, the architect of much of its growth, departed?
Those international adventures, notably into America, have proved costly to unwind. And all the while the domestic engine of the supermarket’s success was being run too hard, so that when competition from the likes of Aldi and Lidl stepped up a gear, Tesco did not have enough in the tank to respond.
The question now is, can it be fixed, or are we watching a once-great empire retreat for good? This latest drastic action shows that the decline has accelerated even since new chief executive Dave Lewis was poached from Unilever six weeks ago. New bosses love to hit the ground running. Fresh back from a brief holiday, marathon man Lewis’s legs are pumping already as he prepares to take his seat in Tesco’s Cheshunt headquarters on Monday, a month earlier than planned.
The man he replaces, Phil Clarke, attracted much criticism for diverting Tesco into posh coffee shops, high-class bakeries and iPad apps, when it was the core, big-box store trading that was under pressure. But Clarke was cognisant of that too, of course. What must worry shareholders most is the rapid store refurbishment programme he championed is not delivering results fast enough. And despite Tesco’s commitment to reducing prices, the home of the Clubcard, once revered for knowing its customers backwards, is finding loyalty such hard work.
Whatever Lewis decides to do, the Tesco chairman Sir Richard Broadbent is handing him as much financial firepower as possible by slashing the dividend and slowing capital expenditure. He does so against a backdrop of turmoil elsewhere in the supermarket sector, with a profits warning from Waitrose and Sainsbury’s trading going backwards too. Only Aldi and Lidl, which showed off its growing confidence by marking the start of a £20m advertising campaign by throwing a dinner party at the Victoria & Albert Museum, are making hay.
Lewis was revered at Unilever. Just like Iain Conn, the BP veteran who will take over the top job at Centrica in a few months, he could not resist testing himself out at the highest level of management.
Those that dismiss him merely as a marketing man do him a disservice. His growing and segmenting of Unilever’s shampoo business over the last few years – think Toni & Guy, Tresemmé and V05 – offer clues to how he can move Tesco away from the one-size-fits-all reputation it has struggled to throw off.
Bruno Monteyne, an analyst at Bernstein Research and former Tesco executive, raised eyebrows recently when he called for the group to be chopped into three: a high-end “Finest” store that would compete with the likes of Waitrose, the regular Tesco operation, and a discount chain. That might be a very expensive cure, but it is clearly something more sophisticated than the old model of stacking the budget range on the bottom shelf and the premium goods at eye-level or higher.
Back to the beginnings of this crisis. How could investors have known that Tesco shares would by now be plumbing 11-year lows, especially when the British economy is motoring again? Wind the clock back to the summer of 2010. Sir Terry had announced his retirement, Clarke was limbering up to replace him – and a trio of old-guard bosses sold shares worth more than £5m in the space of 10 days.
Following the money is not the only indicator but it is always a valid one. That goes as much for cash that is being diverted from the tills elsewhere, to money making its way into directors’ pockets. Lewis must dig deep if he is to turn things around.
Burger King deal can trace its pedigree back to London
The all-American row that broke out over Burger King’s acquisition of coffee and doughnuts chain Tim Hortons this week drowned out one important fact. The Whopper-making company whose headquarters is heading to Canada in what is hotly denied as being just a tax-saving measure can trace its roots back quite quickly to London.
Only two years ago, a cash shell called Justice brought Burger King to market, partnering with its private-equity backer 3G Capital and swapping a London stock market listing for one in New York. If they kept faith through some dizzying financial engineering, investors who sank cash into Justice haven’t done badly. They didn’t know what they were buying when they stumped up £900m or so, only that they were keeping faith with “homeless billionaire” Nicolas Berggruen and his long-time business partner Martin Franklin, as well as a stellar board that included the former City minister Lord Myners and the Dr Doom economist, Nouriel Roubini.
Such cash shells, or Spacs (special-purpose acquisition companies) as they are known, fell out of favour when banking scion Nat Rothschild introduced the Indonesian Bakrie family to the London market. After raising £700m from backers, an alliance was struck to swap a stake in a coal-mining business for shares in the new holding company. Relations soon deteriorated. It was a rough ride for investors. The Square Mile’s reputation was dented too.
But Justice shows that taking a punt can often pay handsomely. Wilbur Ross, the King of Bankruptcy and a prime mover behind Virgin Money, Sir Richard Branson’s long-held ambition to break into high street banking, raised close to $500m (£300m) on Nasdaq recently with the intention of finding a single acquisition target. There is a lot of it about.