Has Tesco passed its sell-by date?
The supermarket giant is facing tough competition as its traditional foes up their game, alex lawson reports
Thursday 05 June 2014
When Tesco chief executive Philip Clarke promised a room of angry farmers last year that the retailer would improve the quality and sourcing of its food after discovering horse DNA in its burgers, he can hardly have thought life could get any more grim.
But just over a year after the National Farmers Union conference, he must feel the horse could have bolted on his chances of continuing predecessor Sir Terry Leahy's rampant 14-year reign of success. The pressure has only intensified for Mr Clarke, who has held the biggest job in retail since 2011.
The UK's largest private-sector employer yesterday revealed sales at shops open longer than a year had fallen 3.7 per cent in the UK in the first quarter and an eye-watering 8 per cent overseas, where problems have tarnished Mr Clarke's standing.
Tesco's problems appear simultaneously simple and complex. Shoppers are picking other retailers from which to buy their food. However, the where, when and how of shoppers' new habits is having a damaging impact on Tesco.
A new type of shopper has emerged from the depths of the economic downturn, who is still determined to spend less and waste less, but also to shop closer to home as well as online. For Tesco, lumbered with a raft of large out-of-town shops geared towards people conducting one "big shop" a week – this move is a daunting one, despite its market-leading position in both small shops and online grocery shopping.
Mr Clarke also admits his rivals have got sharper. The climb of German discounters Aldi and Lidl from benign niche players to the scourge of the major grocers has typified the rapidly changing retail landscape in recent years.
What's more, Tesco's traditional foes are also upping their game. Tesco has vowed to spend £200m on cutting prices this year, with Asda and Morrisons committing similar funds, spooked by the rapid growth of their discount rivals. Waitrose and Marks & Spencer are also defying the odds, written off at the start of the recession as pricey posh grub-sellers, their mix of good value, quality products has charmed food lovers to stay in on a Friday night rather than head to a restaurant.
Figures out this week showed Tesco's market share fell at its fastest rate in 20 years over the past three months, down to 29 per cent; it is losing one million customer visits a week, although it remains the clear market leader, ahead of Asda which has 17.1 per cent of the grocery market.
Espirito Santo analyst Rickin Thakrar says empty shelves, product quality and unripe fruit are a key factor in Tesco's lacklustre performance. "Tesco should reduce its all-year round service of fresh produce – this would improve the general level of produce and reduce 'out of stocks'."
Overseas, the picture is just as grim. In the quarter, sales fell 3.2 per cent in Asia and 1 per cent in Europe as the eurozone crisis, political issues and fierce competition hit its performance.
Richard Hunter, an analyst at Hargreaves Lansdown, says: "Investors need to ponder whether Tesco is a company showing glimpses of revival given its turnaround plan, or whether it is past its sell-by date."
And Mr Clarke? He admitted yesterday that the fall in sales is the worst he could remember in his 40 years with the Hertfordshire-based retailer, founded by Jack Cohen in 1919.
There appears a groundswell of opinion against Mr Clarke and his business. In the City, the "Sell" notes are pouring out from the stockbrokers faster than a cash dispenser; in the media the narrative of the successor struggling to overcome problems which began under Sir Terry is emerging; and anti-corporate campaigners such as Tescopoly continue to bash the retail giant.
Mr Clarke's strategy, first outlined 18 months ago as a combination of reduced new stores, revamped shops and online growth, has had to be redrawn to include lower prices, lower margins and a new finance director (longstanding incumbent Laurie McIlwee is leaving). Even his beloved Liverpool FC slipped up in their pursuit of the Premier League title.
Mr Clarke, a Tesco "lifer" attempting to change its culture, has not buckled under pressure, despite admitting sales will continue to go down this year. "I'm not going anywhere, and I've got more energy and drive than ever before," he said, adding he remains in regular dialogue with chairman Richard Broadbent and the shareholders.
But what of its customers? Tesco has been accused, by former executive and Bernstein analyst Bruno Monteyne of attempting to be "everything to everybody" – the shop on the street corner which draws customer simply because it's the closest.
However, Tesco has taken steps to redress this perception. It has pulled back from "untargeted promotions" to focus on long-term loyalty. Its Clubcard scheme was heralded as a vital cog in Sir Terry's machine, which allowed Tesco to overtake Sainsbury's as the UK's largest grocer.
It has now pinned its hopes on its highly regarded executive, Jill Easterbrook – previously boss of everything from its Dobbies garden centres to its small store One Stop chain – who has been appointed as chief customer officer.
Tesco remains a business in flux. Once the relentless supermarket giant, it is hoping to carve out a new, more humble position as a leisure destination for those after food, clothes, a cup of coffee or a meal out, where shoppers can enjoy a visit; or somewhere for those who want to use their smartphone to shop.
Mr Clarke remains under intense pressure and will hope he doesn't have to face groups of irate farmers, customers or investors in the coming months.
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