Fresh thinking urged at Tesco: Investors to pile on pressure after plunge in profits

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The Independent Online
INSTITUTIONAL shareholder pressure is expected to grow for the chairman of Tesco, Sir Ian MacLaurin, to come up with a fresh strategy after the company announces a fall in annual profits of as much as pounds 65m on Tuesday.

Both NatWest Securities and the stockbroking arm of the Robert Fleming merchant bank predict that Tesco's profits will have dropped from pounds 583.2m to around pounds 518m for the year to the end of February.

This will be the first setback in profits for many years. Although part of the decline will be due to higher depreciation costs, the prime cause has been a relentless squeeze on margins applied by competition from discounters such as Kwik Save as well as rival supermarket groups as the UK food retailing market approaches saturation.

One analyst, Michael Bourke of the stockbrokers Panmure Gordon, has concluded that Tesco has turned from a growth stock into a cash cow, throwing off large amounts of cash but no longer increasing in size.

Tony MacNeary and David Shriver at NatWest agree, estimating that in the final 20 weeks of its last financial year Tesco's sales rose by no more than 2.5 per cent, after allowing for price increases averaging 2 per cent.

Sir Ian has tried to squeeze more growth out of the Tesco formula by launching Metro, a chain of small high-street convenience stores, and devoting more space to fresh food.

He has also struck out into France and Hungary in the first steps towards overseas expansion.

But fund managers are uncomfortably aware that none of this will have much impact on the bottom line for several years. Meanwhile, the group is accumulating a huge cash pile at the bank, which is earning only a few per cent of interest.

'Sir Ian has failed in his attempt to overtake Sainsbury,' Mr Bourke said, 'so he is concentrating on being a rock-solid number two.'

But that is a flat story with which to impress the big institutional investors, which are understood to be starting to cast around for management with the flair and imagination to replace a formula that appears to have run its course after 30 straight years of growth.

Sir Ian, 57, has been chairman or managing director of Tesco for the past 21 years.

(Photograph omitted)