It is often said that “it’s the economy, stupid”, but the root of Tesco’s current predicament is its over-exposure to hypermarkets.

It is often said that “it’s the economy, stupid”, but the root of Tesco’s current predicament is its over-exposure to hypermarkets.

“It’s the economy, stupid” was the slogan of Bill Clinton’s successful 1992 US Presidential campaign against George HW Bush.

Funnily enough, it was in 1992 that Terry Leahy joined the Board of Tesco as Marketing Director, five years before he was appointed group chief executive in 1997.

So what? Well, with so many fingers being pointed at his unfortunate successor Phil Clarke in recent days, after the accounting scandal that erupted on Monday, it’s worth remembering what he inherited from the Leahy regime.

But first let’s look at the implications of the latest UK grocery market share figures (for the four weeks to Sept 14) released by Kantar on Tuesday, showing that Tesco’s total UK sales were down by 5%, despite the growth being seen in online grocery and in convenience stores.

Take out new space and take out the growth in online and convenience and the basic message is that Tesco’s core supermarkets are running nearly 10% down like-for-like, so it’s no wonder that the P&L account is coming under strain.

However, at least the much-maligned Phil Clarke left Tesco UK with strong momentum in the two key growth market segments of online grocery and convenience stores (which is more than can be said, by the way, of Marc Bolland’s legacy at Morrison’s at the end of 2009).

In fact at the beginning of this financial year Tesco had over 3000 UK convenience stores in one form or another (ie, Tesco Express, Tesco Metro and One Stop) and they accounted for about 18% of Tesco’s total UK selling space (excluding ‘dark stores’ and Dobbies).

But what about the hypermarkets? To be fair, Tesco only had nine monsters of over 100,000 sq ft back in February, but they had plenty of superstores of over 50,000 sq ft.

In fact, the 247 Tesco Extra stores (which averaged over 70,000 sq ft in size) accounted for as much as 45% of Tesco’s total UK selling space.

Consumers aren’t doing so many big weekly grocery shops anymore, because of the rapid shift to online and convenience shopping, whilst a lot of non-food spending has moved online, so the big out of town hypermarkets  - with their big non-food presence - face a double whammy.

Tesco is vastly over-exposed to this store format and it is clearly here where they are haemorrhaging the most sales. The inevitable result is that Tesco will soon have to start closing some of these Tesco Extra stores.

And who thought it was a good idea to open all those Tesco Extra stores? Well, Phil Clarke opened a few of them, given the pipeline that he inherited in 2011, and he probably regrets not stopping the UK space race much earlier. But the finger has to be pointed at his predecessor, one Terry Leahy.

Hindsight is a wonderful thing, but it was obvious back in 2011 that Phil Clarke had inherited a lot of structural problems.

And let’s not forget the devastating intervention by the highly regarded former Tesco boss Ian MacLaurin at last year’s Tesco AGM, lamenting how Terry Leahy had milked the core UK business to finance the foolish Fresh & Easy escapade in the US.

In the end Phil Clarke was overwhelmed by the structural problems of Tesco and it will be interesting to hear what his successor Dave Lewis says about his inheritance when he stands up on October 23 to present the delayed interim results.

Unfortunately, the UK isn’t the only country where Tesco have a lot of hypermarkets, because across Central Europe and Asia they face the same problem of changing customer habits.

And it will also be interesting to see what the new finance director Alan Stewart thinks of the carrying value of all those UK and overseas hypermarket properties, on and off the balance sheet.

  • 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.