Although “retail is detail”, as the great John Sainsbury famously said in the 1970s, Phil Clarke’s tendency towards micro-management at Tesco is worrying.
At Sainsbury’s, when he ran the business, John Sainsbury was said to personally taste all own-brand products himself to make sure he was satisfied with their quality and personally approve every own-brand product packaging design himself, which certainly showed attention to detail.
But even in 1992, when John Sainsbury retired, Sainsbury’s wasn’t a huge global group and it was still a family controlled company, so he could be forgiven for taking an interest in what the business put his name on.
A business as big as Tesco is now certainly can’t be micro-managed by its chief executive, so it was not a good sign back in March when Phil Clarke ruthlessly elbowed aside the UK MD, Richard Brasher, and took his job on as well.
Phil Clarke has moved quickly to address the “long standing issues” in the UK (that his predecessor Terry Leahy had allowed to build up) about the quality of the shops, the staff service and the ranges.
The world isn’t standing still while Tesco tries to reposition and catch up with what their rivals are doing in fresh food, and a 1.5% like-for-like sales decline in the first quarter is not a great start to the UK turnaround programme, but Phil Clarke has given himself a lot of wiggle-room by already guiding to a small UK profits decline.
Given the huge numbers of extra staff and money-off coupons being thrown at the stores and at customers, it would be very worrying if the second quarter doesn’t show an improvement in like-for-like sales momentum in the UK, so at this stage Tesco is getting the benefit of the doubt on the UK.
But the overall Tesco profit plan for the year relies on nothing else going wrong elsewhere in the group, while Phil Clarke focuses on fixing the UK business; specifically Tesco needs the huge losses in the US to come down this year, profits at the bank to pick up and the key powerhouses in Europe and Asia to continue delivering the goods.
It is worrying, therefore, that Phil Clarke appears to have sacrificed spending the Jubilee Weekend at home with his family to go to California and look at Fresh & Easy in the US…again.
Fresh & Easy in the US needs to do better, in more ways than one, not least as Phil Clarke seems almost as committed to it as Terry Leahy once was, so the slowdown to “only” 3.6% like-for-like sales growth in the first quarter is a concern.
This is explained by Tesco as a function of “tough comps” and a difficult March rather than any step-up in competition, but Tesco took on some strong local players when it went to the US at the top of the housing market bubble on the West Coast in 2007. The fact that the business is now gearing up for its “biggest ever change of range” in a few weeks time begs the question of why the range needs such a big overhaul.
Meanwhile, a 3.7% fall in sales in the first quarter at Tesco Bank also catches the eye. This is explained away by Tesco by the need to slow things down while the much-vaunted systems migration took place, but the increased pressures on the motor insurance market are a concern, at a time when M&S is aiming to deliver more competition in UK financial services.
And turning to international, “constant currency” has become an accepted metric, but at actual rates first quarter sales were only up by 3% ex-petrol, which is not what we have become used to, given the vast amount of new store space being laid down across the world by Tesco.
But the recent strength of sterling means that Tesco’s global exposure is now producing adverse foreign exchange translation movements, which doesn’t help the outlook for the bottom-line. In like-for-like sales terms, there are one or two encouraging signs, with Eire slightly up and Thailand bouncing back from the floods, but China was only up by 0.6% in the quarter, South Korea was 1.1% down (with problems looming from the new shopping hours restrictions) and Turkey was 2.7% down.
Tesco is lucky not to be exposed to the problems of the peripheral eurozone countries like Spain, Italy and Greece, but Central and Eastern Europe are not immune to the fall-out from the euro crisis and somehow there don’t seem to be any easy pickings overseas for Tesco at present.
The ‘nightmare scenario’ for Tesco therefore remains intact: it is possible that the UK won’t respond to all the investment being thrown at it, it is possible that the losses in the US will be interminable, it is possible that the bank will fail to deliver on its promise and it is possible that Asia and Europe may have to run hard to stand still.
Tesco has held its full-year profit guidance at this stage of the year, but it actually had little choice so soon after the January warning. The hyper-active Phil Clarke would probably survive a second profit warning, given the scale of the problems he inherited with Tesco in the UK, but he wouldn’t survive a third so we are not surprised that he is taking a very keen interest in developments in the US.
Let’s hope he gets a chance to have a well-deserved holiday this summer and that he doesn’t have to rush away and fight more fires in the Tesco empire.
About Nick Bubb
Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.