TMCnet News
Tesco's arrogance and complacency towards rivals has cost them dearly(Guardian Web Via Acquire Media NewsEdge) Well, no one saw that coming. If the outlook for Tesco was grim less than six weeks ago, when the grocer ousted chief executive Phil Clarke, issued its second profit warning of the year and described trading conditions as "weak" – it is now a whole lot worse. The retailer on Friday issued a third, and thumping, profit warning in eight months, taken the axe to its dividend and its spending plans, and announced it is sending for the cavalry. This will take the shape of new chief executive Dave Lewis (hired from Unilever and with zero experience of running shops) earlier than expected. Instead of joining in October he will now have his feet under the desk at Tesco's Cheshunt HQ on Monday morning. The shares – already down a third in the past year – are down more than 5% as investors react to the bad trading news and, in particular, the dividend cut. At around 6% the yield had been one of the few attractions for shareholders. The shares are now trading at their lowest level since September 2003. What has gone wrong? In short, there is a revolution under way in the grocery business and Tesco has taken way too long to wake up to that fact. Complacency and arrogance set in, and the current problems are the result. The discounters and upmarket rivals – Aldi, Lidl and Waitrose – are eating Tesco's breakfast, lunch and tea. Shoppers are moving away from the grocer's vast out-of-town stores in droves, as they find better prices and easier ways to shop - the high street and on their sofa with an iPad. The UK's biggest retailer is bleeding sales. Only this week new data from Kantar – regarded as the gold standard in the supermarket business – showed Tesco's sales down 4% in the past three months compared to a year ago. Its market share is now 28.8% – still vast, but down from 30.2% a year ago. In a £175bn market that is a huge decline, and has happened at a worryingly fast rate. In detail, Tesco has slashed its guidance on trading profits for this year to £2.4bn-£2.5bn, 30% down year on year. The half-year dividend payout has been scythed by 75%, saving £280m. Capital expenditure – mainly IT upgrades and the expensive new store refits, which Clarke insisted were essential to improving performance – is being scaled back by £400m a year to no more than £2.1bn. This will provide Lewis with a useful cash buffer to make changes and invest in price cuts, especially if the dividend cut is repeated at the full year, which would save £900m. It will be far from easy for Lewis, however. He faces the mother of turnaround challenges. Tesco is a vast supertanker and it will take a long time to change direction. He faces issues in almost every one of the dozen markets where Tesco operates, from Turkey to Thailand, but it is the UK, which still generates two thirds of group profits, where he must first focus. As chairman Sir Richard Broadbent made clear on Friday, nothing will be sacred. In the grocer's statement to the stock exchange, Broadbent said: "The board's priority is to improve the performance of the group." He added that Lewis "will be reviewing every aspect of the group's operations" and considering "all options that create value for customers and shareholders". Analysts immediately speculated that could mean hiving off the Asian division as a separate business, quoted in Hong Kong. But it is in the UK where his priorities must lie. He needs to sort out the brand. What does it stand for now? He needs to revamp the marketing – the price promise, which offers shoppers reductions if they can buy cheaper elsewhere, serves only to tell customers that Tesco may not be the wisest choice of shopping destination. Lewis must find a way to reverse the trend of shoppers drifting away from out-of-town stores and provide a reason for them to return. That probably means substantially lower prices (and lower profits). He needs to decide whether to keep the Clubcard, which was once viewed as a hugely powerful tool but has been devalued by constant tinkering. Lewis must also beef up his management. The latest trading update indicates that large parts of Tesco's top team are too wedded to the past. He needs new talent. And he needs to tackle all of this while the discounters continue to turn the screw. Both Aldi and Lidl have recently outlined major expansion plans. The former is spending £20m on a new advertising campaign. Christmas is now on the horizon in the grocery business, and Lewis's priority is to somehow arrest the decline – fast. If he cannot, Friday's profit warning will certainly not be the last. (c) 2014 Guardian Newspapers Limited. |