After Tesco’s worst Christmas for two decades, chief executive Philip Clarke reveals how he plans to get the grocer back on track. Alex Lawson reports.

Philip Clarke is intent on improving the Tesco offer through further investment

Last week’s Christmas update from top retailer Tesco was unprecedented in recent times. So shocking was the 2.3% like-for-like decline in the core UK market, and the warning that trading profits growth would be at the low end of expectations, that £5bn was wiped off Tesco’s stock market valuation in one day.

Tesco’s management, led by group chief executive Philip Clarke, now faces a challenge of the sort they have not had to confront for a very long time – the need to improve against a stable of competitors that has rarely been collectively in such good shape.

Clarke, who has held the top job for less than a year, acknowledges that some changes are needed.

He says it is time to “reset” the UK business after the poor festive performance left management “doing a lot of soul searching”.

Aggrieved at suggestions that Tesco is a retailer in crisis, he insists that Tesco will bounce back under his leadership. “I feel like I’m in control,” he maintains. “This is not going to kill us, it will make us stronger. We are not going to be an also-ran, we are going to be the leader. We will improve our profits next year.”

The planks of his improvement strategy include better service, enhanced store standards such as better availability and improvements to the range.

It is tacit acknowledgement perhaps that Tesco must appeal on more than price, which it has put at the forefront of its positioning – most recently with its Big Price Drop.

Outdated focus

Shore Capital analyst Clive Black says: “Its issues revolve around an over-focus on cost reduction and distraction elsewhere against universally strong competitors. As such, its issues are long-standing and in many respects pre-date Philip Clarke’s tenure as chief executive.”

Danielle Pinnington, managing director of consumer research firm Shoppercentric, believes Tesco’s positioning as far back as 2008 set the retailer on track for where it finds itself today.

She says that the moment Tesco labelled itself ‘the UK’s largest discounter’ was pivotal, fuelling shopper dissatisfaction with basic standards.

She argues that stores have become “cluttered to the point of unpleasant” with point-of-sale materials and secondary displays eating up floorspace; shelf-replenishment standards have dropped and “quality standards fell visibly judging by the number of advertised offers that weren’t real offers when the small print was read”.

But Clarke is confident he can address such concerns. He says: “We want to invest in, and improve, the shopping trip and make it better. In-store there is more focus on category management and great personalisation.”

Tesco’s comparative downfall at Christmas was, of course, not all its own doing. Sainsbury’s, Morrisons and Asda have all sharpened their offer in the past year, and notably since the Big Price Drop launched last autumn.

The Big Price Drop

The Big Price Drop

Sainsbury’s appears confident of its Brand Match programme on well-known products, which boss Justin King says “shows that we are actually cheaper than Tesco and Asda more than half the time”.

Morrisons’ 0.7% Christmas like-for-like growth was below expectations,  but its plans for this year are strong – including the recent launch of its value M Savers brand and chief executive Dalton Philips’ Project Liberate to free floorspace for products.

Asda, meanwhile, has “played the market perception game perfectly”,  according to Black, who says: “It has been vouchers, more than the Asda Price Guarantee, that have done well. Asda is perceived to deliver good value for money.”

The time to act

But Tesco has plenty of options to act upon. Clarke admits Tesco has been running its stores “too hot” – a term that refers to a strained store-replenishment programme, which has often left shelves empty.

The retailer is taking steps to address this. The creation of a group food-sourcing division 18 months ago reveals that Tesco is ensuring stability of supply of large quantities of fresh food. This may perhaps be a worry for Morrisons.

Meanwhile, advances in efficiency in Tesco’s clothing supply chain show there is more margin to be gained from the growth of its F+F clothing brand, alongside its toy and pet food own-label venture brands.

Black says: “If Tesco UK’s problems can be fixed, then it will be through the amalgam of value, stronger ranges, better services and more appealing stores – not quick fixes and not easy.

“Tesco’s quality is still superior to Asda, but it has to sharpen its proposition and narrow its differential with Sainsbury’s on choice, service and quality.”

That does not mean there will not be more action on price. Clarke says: “The first thing that is needed is to sharpen our pricing and we need to step change the performance of the UK business and improve service. We have made a very significant investment and given ourselves the headroom to do the things that we want to do.”

End of hypermarkets?

Out-of-town hypermarkets may well become a thing of the past as Tesco refocuses its business

Out-of-town hypermarkets may well become a thing of the past as Tesco refocuses its business

One of the most fascinating aspects of last week’s update was Clarke’s admission that the time for large out-of-town stores – Tesco has 200 Extra hypermarkets – may be running out as consumers increasingly buy online and make use of services such as click-and-collect.

“Do you need to build large hypermarkets in the UK when the internet is taking so much growth in electrical, in clothing, in general merchandise?” Clarke asked.

With just “a few” more large stores in the pipeline, it seems far more likely Tesco’s future new space will be focused in the convenience sector – which the IGD predicts will be a £42.2bn market by 2016 – and smaller stores.

Tesco is reportedly considering a number of innovative new formats including a greengrocer called Tesco Farm Fresh, an off-licence called Tesco Wine Stores, a sandwich chain called Tesco Grab & Go and a standalone chain Baby & Toddler.

There has been speculation that Tesco will spend £400m on revamping stores, but a Tesco spokesman said, while investment in stores is planned, a figure has not been confirmed.

All the changes being made come against a backdrop of senior management transition, however.

Over the past year, there has been an exodus of top staff, among them former Tesco Bank head and finance director Andrew Higginson, chairman David Reid and Tesco.com boss Laura Wade-Gery.

Other veterans, including head of Asia David Potts and corporate affairs supremo Lucy Neville-Rolfe will leave over the next year. The departures have prompted fears that the exit a year ago of Clarke’s predecessor, Sir Terry Leahy, upset the apple cart.

Panmure Gordon analyst Philip Dorgan says: “With every management change, it becomes less easy to be sure that the right people are in the right jobs, because track records become shorter and shorter.”

However, Clarke says: “There’s been a big change in the team in the past year, but we do not expect any further shake-ups.” 

Clarke shrugged off suggestions he had inherited a poisoned chalice from Leahy and is confident that he has great foundation on which to build. “There isn’t a retail chief executive in the UK that has inherited so many operations to grow around the world,” he says.

One Tesco insider described the business as being seen as the “Manchester United” of the retail industry recently. Tesco has become the business everyone outwardly loves to hate, although people inwardly enjoy its ubiquitous will to win in every area it operates. 

That determination is likely to be put to the test in the coming months, with the pressure on to restore the full confidence of investors.

Global power

Tesco has always been able to turn to encouraging news of expansion overseas – where it operates in 13 countries – to entice investors in the past.

But with the global economic downturn hitting markets in Asia, where Tesco is pulling out of Japan on the back of a poor economy and business proving difficult in the US, where it is mothballing 12 Fresh & Easy stores, there is all the more pressure on Tesco to revive its core UK arm to restore confidence.

Tesco’s formerly unblemished status as the epitome of excellent retail performance and the UK’s largest private sector employer meant reaction to last week’s update was dramatic.

But it is worth recalling that in its last annual report Tesco recorded an increase in global sales of £67.6bn, up 8.1% on 2010 including a £44.6bn contribution from the UK.

The retailer is expected to make a £3.7bn trading profit this year – despite its domestic difficulties.

But the onus is on Clarke and his team to halt, then reverse, the loss of ground in the UK, and he is in combative mood. He says: “The focus now is on improving the shopping trip for customers in every store across the land.” The next couple of years look likely to be extremely hard fought in grocery.

A perception game

Everything from alleged bully-boy tactics with suppliers to poor customer service have been blamed for affecting Tesco’s image in consumers’ eyes.

A YouGov study on public perceptions of supermarkets released less than a month ago, indicated that perhaps Tesco’s poor sales figures should have come as no surprise.

In January 2011, as recorded by YouGov, Tesco’s overall Brand Index score – which compares six variables across Asda, Morrisons, Sainsbury’s and Tesco – stood at +32, second only to Sainsbury’s.

By December, though, Tesco’s overall score had dropped 10 points, well below Sainsbury’s and Morrisons, and just above Asda on +21.

Kate Jones, brand director of consultancy Added Value, observes: “Shoppers have fallen out of love with Tesco. Tesco’s stripped down communications and focus on the money promise does not resonate powerfully enough.”

Tesco’s Indian Agenda

While Tesco faces a head-scratcher at home, operations in India are also providing food for thought, Alex Lawson reports following a visit to Bangalore and Pune to see Tesco’s operations there.

The Indian government recently performed a u-turn on proposed changes that would have made it possible for so-called multi-brand retailer to run their own stores in the country.

Star Bazaar

Star Bazaar

However, Tesco is pressing ahead with plans to further develop its wholesaling to franchise partner Trent’s Star Bazaar growing number of stores.

In this respect, Tesco is creating a new model for the firm in a country still coming to terms with the idea of formalised retail and shopping malls. Tesco corporate and legal affairs director Lucy Neville-Rolfe believes the Star Bazaar offer is perfectly tailored to consumers.

She says: “It is not about changing the consumer mindset. It is about helping Star Bazaar to deliver the right shopping trip for the Indian consumer in whichever city they trade. They want to be able to see and touch staples and fresh produce and they like to see innovations – wide aisles, own brand, packaged food and health and beauty ranges.”