Tesco ditches CEO for Unilever man after profit warning

LONDON Mon Jul 21, 2014 2:59pm EDT

Tesco CEO Philip Clarke speaks during an interview with Thomson Reuters in Cheshunt, southern England May 9, 2011. Picture taken May 9, 2011. REUTERS/Suzanne Plunkett

Tesco CEO Philip Clarke speaks during an interview with Thomson Reuters in Cheshunt, southern England May 9, 2011. Picture taken May 9, 2011.

Credit: Reuters/Suzanne Plunkett

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LONDON (Reuters) - Tesco (TSCO.L) is to ditch chief executive Philip Clarke and replace him with a turnaround specialist from Unilever (ULVR.L), ending a disastrous three year reign as Britain's biggest retailer warned it would again miss profit forecasts.

Just three weeks after backing Clarke at Tesco's annual shareholder meeting, Chairman Richard Broadbent said on Monday it was now time to hand over to a new leader "with fresh perspectives and a new profile."

Clarke, who has spent more than 1 billion pounds ($1.7 billion) on a failed recovery plan in Tesco's main home market, will be succeeded on Oct. 1 by Dave Lewis, who is credited with revamping a succession of businesses at consumer goods group Unilever and is currently its global president of personal care.

A party scheduled for Tuesday to celebrate Clarke's 40-years at Tesco was promptly canceled.

Analysts said the appointment of a non-retailer and the first outside CEO in Tesco's 95-year history could herald a major strategy re-think at the world's third-biggest stores group, which could include big price cuts to win back customers.

"A material change in UK trading strategy cannot be dismissed, which is likely to have considerable implications for the rest of the British sector," said Shore Capital's Clive Black, who upgraded his rating on Tesco stock to hold from sell.

The darling of the retail sector during two decades of uninterrupted earnings growth, Tesco started losing ground in the UK in the final years of long-standing CEO Terry Leahy's tenure. Clarke issued his first profit warning in January 2012.

More recently, it has been squeezed between discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL] at one end and upmarket grocers such as Waitrose [JLP.UL] at the other, and hurt by the slowest growth in the overall UK grocery sector for over a decade.

Its attempts to respond were hampered by its exposure to large out-of-town stores in the UK at a time when more shoppers are buying online, and costly mistakes abroad including a failed expansion into the United States, originally a Leahy initiative.

Clarke, who started at Tesco as a teenager stacking shelves in a store managed by his father, fought back with a wide-ranging plan including trimming prices, revamping stores and product ranges and investing in internet shopping and technology such as the Hudl tablet. But the firm's market share and share price have continued to decline.

One former Tesco director said Clarke, 54, "confused activity with progress," took a series of "short term knee jerk decisions" and had failed to listen to colleagues. "Phil has never listened, Phil is a teller," he said.

According to researchers Kantar Worldpanel, Tesco’s market share dropped to 28.9 percent in June from 30.7 percent when Clarke took over in March 2011. During the same period, Aldi grew to 4.7 percent from 2.1 percent and Lidl to 3.6 percent from 2.5 percent, while Sainsbury’s (SBRY.L) and Wal-Mart's (WMT.N) Asda - Tesco's main rivals - remained largely stable.

Analysts said Lewis' 27-years at a major supplier to the retail sector could help negotiate better prices and that his experience with branding could help a company that was no longer associated by many Britons with either low prices or quality.

DIFFERENT PERSPECTIVE

Tesco shares, which had been languishing near 10-year lows, rose around 3.5 percent in early trade. At 1337 GMT, they were up 1.9 percent at 290.5 pence, topping the FTSE-100 index.

Shares in Sainsbury's and No. 4 player Morrisons (MRW.L) were down 1.6 percent and 1.9 percent respectively.

"Tesco needed somebody fresh from outside the organization. Looking at the company from a different perspective could be helpful," said one institutional shareholder in the retailer.

With Lewis, 49, viewed as heir apparent to Unilever CEO Paul Polman, succession at that firm is now far less clear.

"Tesco’s gain is Unilever’s loss," said Jefferies analyst Martin Deboo, who said Lewis had a track record of turning round businesses in Argentina, Indonesia and also Britain.

“He (Lewis) knows the UK grocery industry very well from the supply side, which is an advantage. He’s smart, entrepreneurial and commercial but at the same time he’s unpretentious. I think he’ll be a good leader and a good cultural fit.” Lewis was chairman of Unilever UK and Ireland from 2007 until 2010, when he became president of the Americas. He took on his latest role as head of personal care products in 2011.

Still, analysts noted the transition from consumer goods to retail has not always been easy. Lars Olofsson, a former Nestle executive with no retail experience, took the top job at France's Carrefour (CARR.PA) in 2009, beginning what turned into a very troubled three years that saw a spate of profit warnings.

Lewis will work alongside new Tesco finance chief Alan Stewart, who quit Marks & Spencer (MKS.L) earlier this month but may not start at Tesco for six months due to a non-compete clause in his contract.

Tesco said trading had turned tougher than expected at the time of its first-quarter update on June 4, and that sales and trading profit in its fiscal first half were "somewhat below expectations."

Shore Capital's Black estimated a 5-10 percent downgrade to his 2014-15 earnings forecast.

Clarke, who had told reporters on June 4 "I'm not going anywhere," will "provide support" to Lewis until January 2015, when he will get a year's salary in lieu of notice, Tesco said.

Lewis will be paid a basic salary of 1.25 million pounds, 525,000 pounds in lieu of his current year cash bonus from Unilever and awards of equivalent expected value in lieu of deferred share awards from Unilever.

($1 = 0.5858 British Pounds)

(Additional reporting by Kate Holton and Nishant Kumar; Editing by Mark Potter)

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