Phil’sbig giveaway

But the Liverpudlian, who started his career at Tesco as a shelf stacker in 1974 and worked his way up to gain a place at the boardroom table, hasn’t been shy about unpicking his predecessor’s ambitious strategy.

In April, he surprised the City by admitting that the supermarket giant “can do better” and within a few months he was unveiling plans to bid sayonara to Tesco’s operations in Japan.

City watchers were impressed by his bold, cut-throat approach but while Clarke was busy scrutinising Tesco’s vast international business, evidence was mounting of a bigger problem back home, where the market leader was rapidly losing ground.

While concerns still persist about the global strategy, particularly regarding Tesco’s loss-making US business Fresh & Easy, Clarke on Friday showed he would not allow himself to be defeated on home territory. He dispatched his UK lieutenant, Richard Brasher, to wage a campaign that would ensure the supermarket giant once again stamped its dominance at the forefront of British grocery retailing.

Armed with £500 million, Brasher will tomorrow trigger a price war, slashing the cost of 3,000 products for the benefit of the financially “squeezed middle” that Tesco says makes up 80 per cent of its customer ranks. Outlining details of this offensive last week, the Brasher claimed it will be Tesco’s biggest price campaign in a quarter of a century.

“I guarantee customers will be saving more, not less,” he said. However, Brasher insisted that the marketing ploy had been several months in the marking and he and his foot soldiers had been working on it for the past six months.

That dates the origins of tomorrow’s assault back to March, when Clarke was handed the keys to the chief executive’s office. Just a few weeks later, during his maiden results presentation to the City, he had been forced to admit to flat like-for-like UK sales.

Though still far ahead of second-place Asda, Tesco has been leaking market share in recent months as major rivals have upped their game and discounters have captured an increasing slice of shoppers’ weekly spend. The most recent figures from research group Kantar Worldpanel showed that Tesco’s slice of the UK grocery market edged 0.4 percentage points lower to 30.4 per cent during the 12 weeks to 4 September.

Some believe the company has been distracted over the past few years by the likes of its struggling venture in Japan.

“They took their eye off the home market and they lost some share to Morrisons and Sainsbury’s and some of the discounters,” says Jon Copestake, retail industry analyst with the Economist Intelligence Unit. “I don’t know that it is complacency, but it could certainly be inferred that Tesco has been focusing quite a lot on foreign markets in recent years.”

Ed Garner, director of research at Kantar Worldpanel, notes that Tesco’s growth has been relatively flat, bumping along at between 30-31 per cent for several years. Part of this dates back to the credit crunch of 2008, when consumers began turning to the discount supermarkets such as Lidl and Aldi.

Though the rise of the German budget chains abated as Britain exited recession, the re-emergence of financial insecurity at the start of this year has once again allowed them to make up ground. Whereas the story the first time around was about attracting new shoppers, this latest wave of popularity has more to do with consumers tilting an increasing amount of their spending towards the discounters, experts say.

“The two biggest things that put people off discount supermarkets are the limited range and some of the alien brand names that you encounter on the shelves,” Garner says. “A new range of consumers have got over that now, and have found that some of the products carried by discounters are just as good as the equivalent offered by the major multiples, so they are doing more comparing and contrasting, and the shopping basket sizes are going up.

“Tesco will want to stop that becoming a habit, and put the discounters back in their box.”

To do this, Tesco says it will cut the price of 1,000 of its own-branded products such as cheese, bread, chicken and biscuits, making these products at least 15 to 20 per cent cheaper than equivalent brands. The other two-thirds of products due for a price drop will be across branded lines, signalling trouble for the likes of online retailer Ocado and Sainsbury’s – both of which have been price matching against Tesco as part of their marketing drive.

“It will undoubtedly put pressure on other retailers’ margins,” says Kate Calvert, retail analyst at Seymour Pierce.

Evolution Securities believes Sainsbury’s will come under the biggest strain, as it has the weakest cashflow in the sector and operates on the lowest margins. Continuing to match Tesco on branded items would therefore have a heavy impact on profits.

While others such as Morrisons are expected to fare better, Evolution’s Andrew Porteous notes that all competitors across the sector will feel the impact to varying degrees. “Tesco is the biggest player in the market, so you are not going to be unaffected by something like this,” he says.

Though Asda dismissed last week’s announcement with a “yawn”, Garner at Kantar Worldpanel says the US-owned supermarket chain will probably be forced into action. The Wal-Mart subsidiary has indicated it will continue with its “10 per cent cheaper” guarantee, but the impact on cashflow could lead to serious scrutiny of last year’s Netto acquisition, which has yet to produce any substantial returns.

Meanwhile, Tesco will defray its costs by scaling back its Clubcard scheme, which for the past two years has offered two points for every £1 spent in-store. This will revert to one point per £1 in four weeks’ time, saving Tesco an estimated £300m or more annually.

This, plus promises of other cost efficiencies such as simplified promotional offers, has left analysts reasonably assured that Tesco’s own margins and profits will not suffer greatly as a result of the price drop campaign. The UK’s leading chain clearly has no intention of repeating the experience of 2008-09, when heavy promotion of its discount brands led to what Tesco itself described as “self-imposed deflation”.

Indeed, Brasher was last week at pains to distance himself from any “price war” terminology and insisted the firm was merely repositioning its pricing for the “new normal” economic circumstances.

“We are not commercially irresponsible,” he said. “It is not a race to the bottom, but what we are is competitive.”

Copestake at the Economist Intelligence Unit meanwhile applauded the move away from multi-buy promotions, which he says are gradually falling out of favour.

“They are focusing just on getting basic prices lower, and to be honest that is almost a no-brainer because regulatory and public pressure is moving in the direction of cutting down on food wastage,” he says.

Question marks remain over other parts of the group, in particular Fresh & Easy which is on course to rack up an estimated £700m in accumulated losses by the end of this year. Clarke, who was Tesco’s international director before landing the top job, has insisted he remains committed to the US despite what some have described as a “very brave decision” to finally pull the plug on Japan.

“Japan is a notoriously difficult market to do anything in,” says Garner at Kantar. “But you could argue there would be a loss of face if they were to pull out of the west coast of the US.”

Clarke says Tesco will break even in the US by the end of the 2012-13 financial year, but until Fresh & Easy reaches that point, Copestake predicts questions will continue to swirl around the operation’s future.

There are also issues closer to home, where the much-hyped Tesco Bank – led by Benny Higgins – has been forced to delay the launch of its mortgage offering until early next year.

However, most have welcomed Clarke’s leadership agenda. Supporters say his backing for the price drop campaign proves his willingness to tackle challenging market circumstances head-on.

“It looks like a case of the new chief executive stepping in and refocusing the company,” says Copestake. “The implication seems to be that Philip Clarke has tasked himself with consolidating Tesco’s position before moving forward.”