On the move: Clarke grapples UK woes as Brasher exits Tesco
Tesco CEO Philip Clarke faces a tough challenge as he takes over responsibility for the group's UK business
Tesco UK CEO Richard Brasher will leave the business later this year, having only taken on leadership of the supermarket group's UK arm 12 months ago. In a move that signals the emphasis that Tesco is placing on improving its UK performance, Brasher will be replaced by group chief executive Philip Clarke. Katy Humphries reports.
Tesco's domestic operations have attracted considerable scrutiny of late. The fundamental problems faced at home by the UK's largest retailer were brought into sharp focus by a shock profit warning at the beginning of the year, the consequence of the group's falling underlying sales and a sustained decline in UK market share.
In January, Tesco revealed same-store sales in its domestic market fell for a fourth consecutive quarter. Despite a robust international performance, the group said this would mean annual profits would come in at the "lower end" of market expectations. The news wiped GBP5bn (US$7.82bn) off the company's market capitalisation in the space of a few days.
Confirmation of the challenges Tesco faces in the UK came at the beginning of this month, when market share data from Kantar Worldpanel revealed that the retailer's market share had reached its lowest level for seven years, dropping to 29.7%. At its peak, in the autumn of 2007, Tesco accounted for 31.8% of spending in UK supermarkets.
Indeed, according to Cliona Lynch, senior analyst at Verdict, Tesco's UK business is facing its most difficult period in its history.
"As the UK's number one grocer, Tesco... has the most to lose to competitors. Verdict estimates Tesco's space in the UK is to reach 37.7m sq ft in 2012, with coverage in every postcode in the UK. This strong coverage is not being supported by growing sales, with the result that sales densities have been falling since 2009, and we expect them to fall by a further 2.9% in 2012," Lynch predicts.
These factors have coalesced to make Tesco management recognise what a number of commentators have been suggesting for some time: that Tesco needs to invest at home to regain momentum in a market that accounts for a hefty 70% of the firm's trading profit.
Only last week, Tesco unveiled plans to invest a "significant" sum - the size of which will weigh on annual profits in the next financial year - in improving its UK business.
So, when Tesco revealed this morning (15 March) that the head of its UK unit, Richard Brasher, will exit the business, the announcement came as something of a surprise.
Brasher has quit the board with immediate effect and will leave the UK's largest retailer, where he has worked for 26 years, in July. His decision to leave, Tesco revealed, is a direct consequence of the increased interest group CEO Philip Clarke is taking in the UK turnaround and Clarke will assume Brasher's responsibilities after his exit.
"As a consequence of Philip Clarke's decision to take a much closer involvement in the UK business Tesco announces today that Richard Brasher has decided to step down," the company said in a statement.
To many, Brasher's departure, after only leading the UK business for a year, will come as proof of underlying tensions in the top-tier of management at the firm.
Following the retirement of former CEO Sir Terry Leahy and the ascension of Clarke, there was some suggestion that Tesco attempted to placate other would-be successors by offering them important leadership roles within the company.
According to Matt Piner, lead consultant at Conlumino, this strategy would seem to have backfired, with the resignation of Brasher coming on the heels of a number of other high-profile departures, including last year's exit of Tesco bank boss Andrew Higginson.
"With Brasher only having been in the post a year, it seems likely that there was tension behind the scenes," Piner suggests. "Tesco's handling of the departure is also questionable and gives the impression of a company in crisis, stumbling from one problem to the next."
The next problem quite clearly being how improve the group's appeal to UK consumers.
With his reputation on the line, Clarke has stepped up to bat, taking full operational control of Tesco's UK unit.
According to Clarke's own assessment, Tesco's problems stem from the fact that the firm chose to cut back on certain service metrics in order to protect profit margins while also investing heavily in its price positioning.
In order to re-engage with consumers, Tesco has said that it will invest in more than just lowering prices and opening new stores. While these strategies will continue apace, the grocer will also look at products and service to improve the in-store experience and revitalise the company's same-store domestic sales.
"I am more determined than ever that these improvements in the UK will result in a better Tesco and an even better shopping trip for customers," Clarke insists.
However, it seems unlikely that achieving same-store sales growth and increasing Tesco's market share will be quite such plain sailing.
One of the problems Clarke will have to grapple with is the increased level of competition in the UK supermarket sector.
Over the past five years, the likes of Sainsbury's and Morrisons have stepped up their game, particularly in their fresh offerings. Meanwhile, at the other end of the spectrum, Asda's continuing focus on low prices has strengthened its value positioning.
The consequence being that the UK is an increasingly expensive market in which to operate. In order to grow sales, it is likely that Tesco will - to a greater or lesser extent - have to sacrifice some margin.
Meanwhile, Clarke's decision to take direct responsibility for the UK could also have implications for the rest of Tesco's business.
As Shorecap analyst Clive Black notes: "While we cannot fault Mr Clarke for shouldering responsibility, demonstrating leadership and taking difficult decisions, we do hope that he can carry the burden of work of UK and group CEO."
While the group's UK chain is the core of Tesco's retail empire, expanding its overseas operations - particularly in emerging markets - offers the company a significant opportunity for future growth. Indeed, international sales expansion has consistently outpaced UK growth for a number of years and overseas Tesco is establishing a footprint that will drive profitability for decades to come.
In devoting an increased amount of his energy to revitalising the UK business, Clarke must also ensure that Tesco does not take its eyes off the prize internationally. It seems likely then that Clarke's increased responsibility for the UK will be a stop-gap measure and when the UK is ticking along nicely once again, a new manager will likely be appointed to oversea day-to-day operations in the country.
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