By setting expectations to “doom” Dave Lewis has given himself a window to radically refocus Tesco’s model and business.
By Mimi Turner
Dave Lewis is probably the least-envied boss in the FTSE 100. Since taking the reins the Tesco CEO he has suffered the kind of baptism of fire that comes along once in a business generation.
Financial commentators remain transfixed by the slow motion car crash that is Britain’s biggest supermarket chain, while at Tesco’s tills, customers grumble openly about management disarray. Staff morale is in a bucket just at the time customers are moving away from the traditional shopping experience full stop.
Tesco’s size, which was once its big advantage, has proved to be its Achilles heel. Rarely has an institution where most of the country has shopped lost its way so seriously. The biggest retailer in Britain has found itself out of touch.
So far, so catastrophic for Tesco’s new CEO. But Dave Lewis can snatch victory from the jaws of defeat. Tesco’s implosion has handed him a mandate for transformational change. Tesco’s reason for existing, its ethos and its relationship with customers are all up for review. He can transform the business.
Here are my five reasons I think he can win:
Tesco is still the biggest
Lidl and Aldi may be snapping at Tesco’s heels, but like Yorkshire terriers yapping away at a Great Dane, they are tiny by comparison. Aldi has 4.8% of the grocery market and Lidl has 3.5%. Tesco’s numbers may be going in the wrong direction, but it still has 29% of the groceries market and buys more from suppliers than anyone else.
The truth is that while Lidl and Aldi have nibbled away at Tesco’s certainties, Britain’s biggest supermarket has lost share to Sainbury’s, Morrisons, Asda and Waitrose as well. The latter have passed on lower prices to customers when Tesco has not. When Waitrose (5% share) and Sainsbury’s (16%) offer branded products at the same prices as Tesco, it is because they are taking less profit than the biggest supermarket in the country.
Tesco has yet to invent a model that competes with discounters who offer their narrow product range still packed in pallets to save on staff costs. But without a doubt Tesco has more power than anyone else to push its prices down. If it can’t match prices with its competitors, it is because it is taking too much profit.
Rock bottom is the right place to start
As every account of Tesco’s travails in the business pages points out, shares are trading at their lowest point in more than a decade - and are worth half of what they were a year ago.
Investors have abandoned hope of a turnaround in the short or medium-term and some have dumped the stock. The likes of Blackrock and Warren Buffet have added to the entertainment by delivering a spanking on their way out. The Tesco investment was “a huge mistake” the Berkshire Hathaway founder helpfully told CNBC, shunting the share price still lower.
Disastrous though the recent share performance has been, it is an advantage for Lewis to start at rock bottom rather than for investors to lose faith six months into his stewardship. It’s better for him to shed the shareholders who are not in the game for the long term rather than to have them throw in the cards when his strategy is being built.
For Dave Lewis, the lower the shares are in the short term, the better the future will look.
He can bury the past
Whatever the outcome of the multiple inquiries into the murky practices of squeezing supplier “overrides” and promotional payments, this crisis will burn Philip Clarke’s legacy and underline the extent to which his strategy failed.
The catastrophic collapse in faith means that Lewis has one big advantage: he can trash his predecessors. His transformation plan will point to their toxic legacy as the reason Tesco has to change.
Burying the past regime is a privilege that was never afforded to Phil Clarke, who inherited the mantle of Terry Leahy just as Tescopoly growth era overheated. Mike Coupe will struggle with the legacy of City sweetheart Justin King, even though his first step has been to launch a strategic review of Sainsbury’s business as its sales decline.
Neither Dalton Phillips at Morrisons nor Marc Bolland at M&S had the chance to cast off the charismatic leaders of the past. That has hurt their ability to evolve. Dave Lewis has no such issues: he is free to bin recent history and pledge that the future will be different.
Tesco’s historic margin commitment is, well, history
Like Labour’s Clause Four, Tesco’s industry-leading margin has underpinned its identity. Like Clause Four, it will have to be dropped for Tesco to reinivent itself. Without unshackling itself from its margin commitment Tesco cannot take a price-war to Aldi and Lidl and manage its £574 million pension payments and sale and leaseback commitments at the same time.
The good news is that the £250 million black hole in the stated half-year profits has buried the margin commitment anyway. Whatever the real margin is, it is certainly less than 5%. Going forward, the fundamentals behind the commitment are in serious doubt. No-one, not even Lewis or chairman Richard Broadbent, can say with certainty what full-year profits will be, so the margin is a very grey area indeed.
Tesco’s future has to be different from its past
Never again will Tesco recover the swagger and arrogance of its heyday. Its decades of unstoppable growth and regional sprawl are over. The Tesco Extra, Tesco Express and Tesco Metro formats have been eating one another’s customers for a while, and now the music has stopped.
Tesco’s best hope for the future is to invent a new way of being relevant to customers. What that looks like will take time to decide. Fewer stores means massive closures, lower prices means lower margins, more quality means more investment, store transformation means a new vision, online growth means making the profitability work, social media means that pricing is transparent, whether Tesco likes it or not.
Dave Lewis’s only task is to reinvent the business so that it reflects a customer base with which it has lost touch. He doesn’t have to tinker with the old strategy hoping that some quick-fixes will work. His job is to rewrite the rationale for the business as a whole.
And where Tesco goes, inevitably the market will follow.
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