Has Tesco chief reached the end of his shelf life?

Tesco chief Phil Clarke had a grim message for investors. Picture: Getty

But there was nothing magical about the grim message Tesco boss Phil Clarke had for investors last week. Clarke announced a 3.8 per cent slump in quarterly UK sales, and admitted it was the worst performance at Britain’s biggest supermarket group that he had seen in his time there, which began on the shopfloor aged just 14.

Even more ominous for the Tesco chief executive’s future tenure was that he refused to promise the bad times would end. “I’m not making any promises about sales improvement in the next few quarters,” he admitted in a telephone conference call. It was like a red rag to a bull for some institutional investors that are publicly or privately baying for the boss’s blood. Even worse, it was not lost on investors that the poor performance was against a relatively soft comparative a year ago during the height of the horsemeat scandal.

Many in the supermarket industry believe Clarke, an affable though determined Liverpudlian character, has another year at best to show his £1 billion turnaround programme for the grocery behemoth is working or he will be ousted.

As part of this strategy, Tesco has already refurbished 178 superstores – more than a third of the company’s superstore estate – sometimes unflatteringly described by critics as “industrial-type premises”. Many hundreds of new shopfloor staff have also been hired, and product ranges refreshed. The group’s online business and convenience stores Metro and Express are doing well.

But to critics the transformation programme is running hard to stand still. Tesco, like arch-rivals Asda, Morrisons and Sainsbury’s, is squeezed between discounters Aldi and Lidl, nipping at their heels on price, and successful upmarket operators Waitrose and Marks & Spencer. Some believe Clarke is on borrowed time at the helm of the group he took over from Sir Terry Leahy in 2011.

One leading fund manager who has publicly called for management change is Robert Talbut, chief investment officer of Royal London Asset Management (RLAM). “My view is that the business needs a management team who will implement more bold actions in order to restart growth. At present we appear to have managed decline,” Talbut said. “RLAM is not currently a major Tesco shareholder, partly because of its concerns about the company’s strategy and performance, and potentially if the management team was to implement bolder actions we may consider increasing our shareholding.”

One food retailing analyst commented: “If sales are not moving in the right direction by this time next year I think the pressure on Clarke will be irresistible. With last week’s update, he has bought himself two or three more quarters at best to show that his strategy is working.”

To be fair to the boss, there is virtually no outside consensus about what Tesco needs to do to reverse decline. Some believe the boss should grasp the nettle and launch an all-out price war with rivals. They argue that in a promotion slug-fest it is normally the biggest slugger who wins.

They point scathingly to Clarke’s current promise of £200 million of price promotions compared to the £1bn promised over three years by rival Morrisons. But Paul Mumford, fund manager with Cavendish Asset Management, which owns 550,000 Tesco shares, disagrees. “Nobody really wins in a price war, and Tesco already has good initiatives like its Clubcard loyalty scheme and petrol offer to keep customers sticky. I think he is probably telling it like it is at the moment for the sector”, he said.

Instead, Mumford feels Clarke should step up the group’s non-food offering where he believes Tesco enjoys a natural advantage. “And in addition to emphasising its non-food offer, Tesco should also be stressing the range and quality of its food product and improve levels of customer service. It should not just be a chase to regain market share (Tesco has a market-leading 29 per cent, but the discounters have been making sharp inroads).

“I think all the main supermarket groups have flawed strategies. The market has seen systemic change and it’s not going to get any bigger.” Clarke himself seemed to be thinking along these lines last week. “There hasn’t been a quarter of like-for-like sales like this before that I can remember, but I’ve never seen a period of such intense transformation for the industry,” he said.

However, the chief executive added defiantly: “Nobody could put me under more pressure than myself. But this is my absolute passion and I know I’ve got a job to do. The business is exactly where we thought it would be because we are restructuring. I’m not going anywhere and I’ve got more energy and drive than ever before.”

To whatever extent the group gets involved in a price war, institutional investors are uneasy that it will mean its profit margins, at the top of the sector at about 5 per cent, but falling, will have further to slide. Meanwhile, they point out that while Clarke partly blames disruption at stores being refurbished for the hit to revenues and profits, this should be offset by now by much-improved performances at the stores which have been upgraded.

As the pressure bandwagon picks up momentum, some also say it took Clarke three years to reverse out of America, a disastrous initiative from his generally revered predecessor, Leahy. One analyst said: “The Fresh & Easy brand in the States ate up £1bn of investment, never worked from the off, was never profitable, and Clarke should have bitten the bullet much earlier on pulling the plug. Instead, the problem drifted.”

He is also indelibly linked with Tesco’s first fall in annual profits in nearly two decades in April last year and a further near-7 per cent fall in the latest trading year. He announced his revival plan for the business two years ago.

Many analysts believe even if the transformation programme gains some traction it will not be fast enough for there not to be another profits fall this financial year.

By some City estimates, Tesco has lost a million shoppers a week. Dave McCarthy, an analyst with HSBC, notes: “It lost its emotional connection with the customer.”

Clarke retains some supporters. Harris Associates, a top ten Tesco investor, said it was premature to judge the success of the turnaround programme when it was in mid-stream and that radical change in a business “is not something that happens overnight”.

Even so, Tesco’s scars, reflected in a share price well off its seven-year highs of nearly 500p compared with Friday’s level of around 290p, still seem unthinkable to many long-term watchers of the retail scene. Under Leahy, it took over from Sainsbury’s as Britain’s biggest supermarket group in the mid 1990s, and broadened appeal with moves into areas such as clothing, banking and garden centres. It expanded rapidly abroad, its footprint developing from Central and Eastern Europe to the Far East. Even with its difficulties in recent years the company is still Britain’s largest private sector employer and takes about £1 in every £8 spent in the retail sector.

Sales in some of those key overseas markets are falling or relatively stagnant, largely due to economic factors. But, even here, views differ on what the company should do. Some believe Clarke should get out of some markets abroad; others say the cycle will turn and those overseas businesses will again provide Tesco with earnings ballast to offset any periodic downturns in the UK. But, in reality, Clarke’s fate will surely swing on whether he can turn the home turf business around, given that it accounts for two-thirds of sales and profits.

As one observer commented: “Tesco and Clarke’s survival is at a tipping point. The next year will either show definitely the company has turned the corner or that the transformation programme has been a damp squib. We are approaching showtime.”