It is, of course, unfair to give Dave Lewis, Tesco’s new boss, a pasting because he didn’t present a full master plan last week. He’s been in the job seven weeks, and half his energy will have been consumed by the accounting scandal.By contrast, Tesco’s loss of competitive clout in the UK dates back half a decade, to the time the company was getting sucked into its doomed Fresh & Easy adventure in the US.
Yet it was hard to avoid the impression that Lewis is already on the back foot. Dynamic Dave, as he was known at Unilever, did not live up to the billing. His warm words about reconnecting with customers and restoring competitiveness could have been spoken by his predecessor, Philip Clarke. What shareholders – and shoppers – want to know is how Tesco will be different under Lewis, who declared: “Tesco is always at its best when it puts customers first.”
About 99% of retailers would say the same about their businesses. But in a world of finite capital, and with a share price that has halved since the start of the year, the real question at Tesco is: what’s the right balance between prices, service and quality products? Answers, one assumes, will arrive eventually. But the size of the task suddenly seems monumental, given the speed of the decline in sales and profits.
“We continue to believe that Tesco profits could go to zero in the UK, even if it were to generate 1-2% like-for-like [sales increases], because of high running costs,” say analysts at BESI. Their research shows Tesco is 38% more expensive than Aldi on comparable products. For good measure, it reckons the group’s property portfolio, valued at £20bn, may only be worth £8-10bn.
In that context, the oddest part of Lewis’s first announcement was the hint that he would prefer to avoid a rights issue: “There may be something we can do in terms of the other assets.”
That seems to imply asset sales. But disposals takes time, and only the Asian operations would raise serious money. They could be worth £9bn but, if Tesco still hopes to return to international expansion one day, they are surely the ones to keep. It would not look good to try to avoid a rights issue but be bounced into one anyway in, say, a year’s time. Many City analysts predict precisely that.
Lewis, of course, deserves some sympathy. He is a non-retailer attempting the biggest retailing turnaround ever seen in the UK. Eight of his senior executives are suspended; chairman Sir Richard Broadbent is falling on his sword and a replacement may not arrive for many months. And Tesco’s former strength – its out-of-town hypermarkets – are now its biggest weakness. Anybody in his shoes might wish to appeal for time before revealing his plans. But the uncomfortable truth for Tesco is that, under Clarke, three years have been wasted on cul-de-sacs like Blinkbox and Harris + Hoole.
Lewis, pondering what made Tesco such a formidable force in the first place, ought to know that one feature was management’s single-minded pursuit of clear strategic goals. He’s got a little time to decide his priorities – but not as long as he seems to want.
