Martin Flanagan: Supertanker Tesco is turning around

Tesco's profits fell sharply, but Martin Flanagan believes the City will cut chief executive Dave Lewis some slack. Picture: Steven Brown

Tesco's profits fell sharply, but Martin Flanagan believes the City will cut chief executive Dave Lewis some slack. Picture: Steven Brown

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Sales for show, profits for dough, as one old business maxim has it.

But when you are trying to stabilise a retailing supertanker it is usually declining sales that are addressed first, even if there is short-term margin pain, in order to eventually get the earnings right.

As such, Dave Lewis at the helm of the Good Ship Tesco won’t be overly disappointed that there has been a near-30 per cent slide in halftime pre-tax profits to £71 million when Britain’s biggest supermarket group has notched up a third consecutive quarter of same-floorspace sales growth.

READ MORE: Tesco profits slide 28% despite recovery in sales

That revenue turnaround became a dim-and-distant prospect under the ill-starred stewardship of Lewis’s predecessor, Phil Clarke, when falling sales and profit warnings became the norm.

Profits this time have been hit by the continuing fierce war that the Big Four food retailers are waging against the parvenu upstarts with a spring in their step, Aldi and Lidl.

Lewis has used old-fashioned price-cutting to help staunch the sales blood, and they rose 0.9 per cent in the second quarter. In textbook fashion, he is now able to turn to margins to try and get profits back on track.

The Tesco boss said the group was targeting £1.5 billion of costcuts, including the company’s distribution system and store operating model, with an ambitious target of getting operating margins to between 3.5 and 4 per cent by the end of the 2019-20 financial year.

Some would say it is more unrealistic than ambitious in the current climate of discounter incursions and food price deflation. And that is without any possible gradual fall in consumer confidence post-Brexit, even though that is not apparent yet.

But at least Lewis seems to have been working to a chronological plan since he parachuted in to the Tesco malaise in the autum of 2014.

First there was major administrative retrenchment and a withdrawal from businesses deemed non-core. Then came the taking on of the discounters on price. Now there is renewed attention to margins.

That third component might be the toughest one of them all to pull off, but the City will cut Lewis some slack after his impressive start.

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