LONDON, April 22 (Reuters) - Tesco’s boss is keeping to the belief that “retail is detail” to revive the world No. 3 grocer’s performance, but while his strategy was well received, the former shelf-stacker has less than two years to prove he is right.
Chief Executive Phil Clarke unveiled a 1 billion pound ($1.6 billion) plan last week to improve the look and feel of Tesco stores, offer better quality and more products, hire extra staff and train them to be more friendly in order to stop market share being eaten away by fiercely competitive rivals in Britain.
“Execution is key. Turning the UK around is all about doing 1,000 things 1 percent better, the devil being in the detail,” said Philip Dorgan, retail analyst at Panmure Gordon.
Last month, Clarke jettisoned the head of the UK operation, assumed his duties and is now directly in the firing line if his plans fail to halt a slide in sales.
If anyone should be able to pull off a strategy based on the nitty gritty of shops and shelves it should be Clarke, a retailer for life who was born into the Tesco business.
The son of a Tesco store manager, Clarke’s first job, aged 14, was stacking shelves at a local Tesco store on Saturdays. Rejoining the firm as a graduate trainee in 1981, he worked his way up through the ranks, succeeding longstanding CEO Terry Leahy in March 2011.
In his 14 years at the helm, Leahy transformed Tesco from a British also-ran into a seemingly unstoppable international juggernaut which now has 5,300 stores across 14 countries.
But UK sales were already faltering and 10 months after Leahy’s departure, Clarke had to issue Tesco’s first profit warning in 20 years.
A top 20 Tesco shareholder said investors will need to give Clarke time to restore the magic to the UK where it is still the dominant player with 30 percent of the grocery market.
“What they are doing looks like a much more patient approach I would say, which is the right thing to do I suspect, especially in this economic backdrop,” the shareholder said.
“There’s no point in trying to push it too quickly. If it has taken you a little while to get into the problem you’re in, you are not going to cure it in six months.”
Panmure Gordan’s Dorgan said Clarke came across well when he presented his revival plans to the City last week.
“I‘m taking a view that they can turn it around, probably not as fast as they think they can, but that they can do it,” he said. “There’s no pressure on him at the moment as long as he can show improvements and deliver what he says he’s going to deliver.”
Ratings agency Moody’s took a different view and downgraded Tesco’s long-term senior unsecured rating by one notch to Baa1 from A3, saying it would take time for Tesco to return to its previous levels of profit growth.
Clarke also plans to grow Tesco’s internet shopping business and, like other supermarket chains, will focus on convenience stores which have gained popularity in the economic slowdown as shoppers buy more locally and do smaller shops.
“It will ultimately be the retailer’s understanding of its shoppers’ mentality and how it implements its initiatives which will determine if it regains its former position of strength,” said retail research group Conlumino.
Successful turnarounds at Britain’s No. 4 grocer Wm Morrison Supermarkets, under Marc Bolland (now at Marks & Spencer ) and at No. 3 player J Sainsbury, under Justin King, have been about innovative marketing that changes customer perceptions of a brand as well as a better store experience.
Clarke clearly recognises this. Earlier this month he launched a review of Tesco’s multimillion-pound brand communications strategy that could spell the end of its two-decade old “Every Little Helps” mantra.
Here the shadow of Leahy, the master marketeer who launched the massively successful Clubcard loyalty scheme, looms large.
Analysts also point out that the competitive landscape has changed, with British No. 2 Asda, owned by Wal-Mart, Morrison’s and Sainsbury’s all fighting hard for market share.
Tesco trades at a forward price to earnings multiple of 9.39 times while Sainsbury’s is at 11.47 and Morrisons at 10.51, according to Thomson Reuters data. Its shares lost about a quarter of their value after January’s profit warning and have barely recovered since.
Veteran retail analyst Nick Bubb said the jury is still out on whether Clarke is the man to restore Tesco’s fortunes.
“His honesty in admitting what needs to be done is commendable, but he will be judged on his delivery of the recovery plan and, although ‘retail is detail’, his tendency towards micro-management is worrying,” he said.
“Clarke would probably survive a second profit warning, given the scale of the problems Tesco faces in the UK, but he wouldn’t survive a third profit warning, so in reality he has 18 months to deliver a shift in profits momentum.”
Clarke forecasts no growth in operating profit in 2012/13, down from forecasts of a 10 percent rise. Last year, Tesco made an underlying group profit of 3.9 billion pounds on record sales of 72 billion pounds.
“With all that’s been written about Tesco in the last three months you might have the impression that Tesco is struggling but we’re not,” he said.
“We’re already the second most profitable retailer in the world (after Wal-Mart) and the sales growth trajectory makes it likely we’ll become the second largest by sales.” Current number two Carrefour made 91.5 billion euros in 2011.