When Dave Lewis takes over as chief executive of Tesco in October, after the sudden ousting of Philip Clarke last week, he faces the task of reviving Britain’s biggest retailer. The supermarket chain is under siege from the German discounters, saddled with too many big stores and battling problems in its overseas operations.
Andrew Seth, the author of The Grocers and Supermarket Wars, who worked with Mr Lewis at Unilever, says: “There is no question this fellow can be radical.” The man responsible for Dove soap and Lynx deodorant is expected to spend his first months at Tesco listening. But Mr Seth is in no doubt Mr Lewis will make far-reaching changes. “He is a man of action,” he says.
So just what action could Mr Lewis take to turn Tesco round?
Back to basics
During his three-and-a-half years at Tesco, Mr Clarke added in-house brands, such as “Chokablok” ice cream, and launched the Hudl tablet. He bought Blinkbox, the movie streaming service, and Mobcast, the digital book store. To spruce up big stores he introduced the Harris + Hoole coffee chain and spent £50m buying restaurant chain Giraffe.
Some analysts, former insiders and business turnround experts urge Mr Lewis to ditch these distractions, and concentrate instead on the basics – price, service and stores. In short, Tesco should be doing a better job for customers.
Even the Clubcard loyalty card, central to Tesco for the past 20 years, Tesco Bank and Dobbies Garden Centres, could be vulnerable. “Offer people something they want in UK food retail,” says Bruno Monteyne, analyst at Bernstein. “Don’t worry about their phone, tablet and video.”
Then there are Tesco’s four corporate jets. The smart money would be on Mr Lewis offloading those too.
Retrench
Even after pulling out of Japan, the US, and entering into a joint venture in China, Tesco still operates in 11 international markets. Christine Cross, the former Tesco executive turned retail consultant, says Mr Lewis may consider taking an axe to the international empire, given domestic needs. “I think he will take a long hard look at Thailand and Korea,” says Ms Cross.
She suggests that Mr Lewis could follow the path the company took in China, and extend a joint venture with local partners. Ms Cross says she would be “quite brutal” with Tesco’s assets in central Europe in order to safeguard investment needed in the core UK business. Other analysts suggest that the operation in Turkey – which Mr Clarke tried to sell – would be an obvious candidate for disposal.
Pruning the international portfolio is the path taken by Georges Plassat, the chief executive of Carrefour. But it is not just overseas that Tesco has superfluous assets. In the UK, it has over 3,000 stores, of which about 250 are large hypermarkets. It has already set about shrinking stores, but could Mr Lewis go further? Jonathan Pritchard, analyst at Oriel Securities, says one of the problems facing the new chief executive is that there will be little appetite to take big box stores off of his hands.
Go nuclear on price
Any cash raised from selling off international assets could be put into a war chest to cut prices. Analysts, former insiders and business turnround experts say this should be Mr Lewis’s first priority. “The overriding strategy has to be price,” says Richard Hyman, the analyst who runs the Richard Talks Retail website. “Tesco has to be cheapest on everything all the time.”
One senior executive estimates that Tesco’s price gap with Aldi could be as much as 20 per cent, while the gap with Asda is in high single digits. It could cost between £2bn to £4bn to put this right, a figure that would lead to the inevitable “kitchen sinking” of profits.
An even more radical solution would be to split Tesco’s UK business. Mr Monteyne says this could mean operating a hard discounter in areas where price matters most, and upmarket stores in more affluent areas, “because your average Russian banker in central London doesn’t need low prices”. The group could also operate standard Tesco stores in mid-market towns. Such actions could help Tesco see off the threat of the German discounters, as it did in the early 1990s when it introduced its value range.
While a price war could be uncomfortable for Tesco, Jaime Vazquez, analyst at JP Morgan Cazenove, suggests it could also be painful for rivals Wm Morrison and Sainsbury. Some experienced retailers believe this is exactly where Mr Lewis will turn his fire.
Date: July 27, 2014
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