UPDATE 3-Tesco to step up price cuts as CEO defies pressure to quit

Wed Apr 16, 2014 8:35am EDT

* CEO Clarke says will see through his plan after calls to quit

* Reports 6 percent fall in annual group trading profit

* Takes 734 mln stg charge on European business, 540 mln on China

* UK underlying sales fell 3 percent in fourth quarter (Adds details)

By Neil Maidment and Kate Holton

LONDON, April 16 (Reuters) - Tesco boss Philip Clarke vowed to win back shoppers with millions of pounds of price cuts after a second year of falling profits cast doubt on his efforts to turn around the fortunes of Britain's biggest retailer.

Despite calls from investors to quit or change tack, with several worried about a price war, Clarke insisted he would see through his "bold" plan to rebuild the company, which had been the darling of the sector during two decades of uninterrupted earnings growth before a shock profit warning in 2012.

Tesco shares, at 10-year lows, jumped 5 percent in early trade as Clarke said he would respond to the discount groups and upmarket grocers that have hit Tesco from both sides and sent its British market share to a near 10-year low of 28.6 percent.

"I have got no intention of going anywhere," Clarke, a 40-year Tesco veteran, told reporters. "All my waking hours are spent running Tesco. It's what I love. I am going to see this thing through."

One of Tesco's largest 20 investors was reported on Tuesday as having called Clarke the "wrong person for the job" with the "wrong strategy".

Another shareholder told Reuters the strategy of cutting prices now to compete with increasingly popular discounters Aldi and Lidl was a "shambles", arguing that with wages improving it should instead focus on improving service.

Tesco, the world's third-largest retailer, with a market valuation of 23 billion pounds and 530,000 staff, has suffered on several fronts in recent years.

Overseas, failed attempts to break into the United States and Japan and troubles in China and Europe have proved a distraction to its home market, where it still makes over two-thirds of sales.

Alongside a 6 percent fall in annual group trading profit posted on Wednesday, Tesco took a 734 million pound writedown on the value of its European businesses, where trading has slowed, and a one-off charge of 540 million pounds in China. That puts charges and writedowns for its overseas forays at close to 3 billion pounds in two years.

At home, despite Clarke's spending billions on improving services and stores, things have yet to improve, and the firm abandoned its industry-leading margin target two months ago.

A 3 percent decline in underlying UK sales for its fourth quarter was the worst quarterly drop since he took the top job three years ago.

PRICE WAR?

"The results aren't pretty, but they are possibly slightly better than some had been expecting," one of the firm's top 20 investors told Reuters on condition of anonymity. "Tesco might get a little respite from the recent relentless negativity.

"I'm not in the mob of people clamouring for Clarke's head. I am keen that the company adopts a less expansionary strategy and doesn't start a price war in the UK."

In common with Britain's three other leading grocers - Wal-Mart's Asda, Sainsbury's and Morrisons - Tesco has been squeezed between hard discounters Aldi and Lidl and by Waitrose and Marks & Spencer at the premium end.

Facing the slowest rate of growth in the British market since 2005, Clarke said customers would see prices coming down and stores modernised at a faster rate than initially planned.

"We have a big and bold plan, and customers are going to get better value from Tesco during 2014," he told reporters. He declined to put a price on the scale of the cuts that will be added to a 200 million pound programme announced in February.

"200 million was just the start, you'll see more coming," he said.

The plans at Tesco, which among global retailers trails only Carrefour and Wal-Mart, will do little to ease industry fears of a price war in Britain, with both Asda and Morrison having each committed to spending 1 billion pounds on price cuts.

Clarke described Aldi and Lidl, which have managed sales growth of 35.3 percent and 17.2 percent, respectively, as "very formidable" and said while it was hard to match their prices it would ensure it stayed competitive on key products.

He added that recent price cuts of 24 percent on key lines such as milk, eggs and chicken had boosted volumes by 30 percent.

UNDER PRESSURE

Tesco's problems in its stores have been compounded by troubles in the boardroom, with finance chief Laurie McIlwee announcing his resignation this month, leaving Clarke as the only executive director on Tesco's board.

McIlwee, who will stay in the job until a replacement is found, denied reports on Wednesday that he had clashed with Clarke over strategy.

"Whether today marks the nadir of Tesco's fortunes remains to be seen, as the beleaguered behemoth remains under pressure," said Richard Hunter, head of equities at Lansdown Stockbrokers.

"The encroachment of the discounters in the grocery space, cut-throat margins and difficult trading conditions both home and abroad have conspired to put Tesco in the full glare of the bears, and the accompanying management outlook comments seem to echo that the recovery is a long-term plan."

Trading profit for the year to Feb. 22 was 3.3 billion pounds, in line with forecasts. The dividend was kept at 14.76 pence a share.

Overseas, group trading profit was down 5.6 percent in Asia and down 28 percent in Europe, with a slump in trade in the Czech Republic, Hungary, Poland, Slovakia, Turkey and Ireland.

Many retailers across Europe have been struggling as shoppers' disposable income is squeezed by subdued wage growth and austerity measures, and most have responded with price cuts.

Last year, having pulled out of the U.S. after six years spent trying to crack it, it merged its business in China with that of China Resources Enterprise Ltd.

Group underlying pretax profit fell 6.9 percent to 3.05 billion pounds in the year, and according to Reuters data will fall 5.8 percent to 2.87 billion for its 2015 fiscal year. ($1 = 0.5977 British Pounds) (Additional reporting by Chris Vellacott; Editing by Will Waterman)

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