On the move: What's in store from Tesco's new CEO?
Tesco in no-man's land in UK grocery market, squeezed by more upmarket and value-focused rivals
Tesco CEO Philip Clarke is to step down from the UK retailer, with the announcement made this morning (21 July) alongside another profit warning. Clarke will be replaced by Unilever executive Dave Lewis in October. While investors have responded positively to the news, manufacturers doing business in the UK may be waiting with baited breath to see if Lewis will respond to Tesco's strategic problems by extending its price focus. Katy Askew reports.
Tesco this morning (21 July) gave another sign of its struggles when it warned it would miss first-half profit expectations. The UK's largest grocer said domestic trading conditions are "more challenging" than management anticipated when the under-pressure retailer delivered its first-quarter results in June.
However, the news was accompanied by the announcement that Tesco CEO Philip Clarke will stand down after three challenging years in the hot seat - and the retailer's shares promptly rose. Tesco's continued under-performance has resulted in growing pressure for heads to roll and, with another profit warning under Clarke's belt, it seems the pressure was too great for Tesco's board to ignore.
Commenting on the move, chairman Sir Richard Broadbent said it was an "appropriate moment" to hand over to "a new leader with fresh perspectives and a new profile".
Incoming CEO Dave Lewis certainly has that. With almost thirty years of FMCG experience, Lewis will join Tesco from Unilever, where he held a number of positions including, most recently, heading up the group's global personal care business. Significantly, during his time at Unilever, Lewis oversaw the turnaround of struggling business units, including improving the fortunes of the consumer goods giant in the UK and Ireland and boosting the performance of Unilever's home and personal care holdings in central and eastern Europe.
"Dave Lewis brings a wealth of international consumer experience and expertise in change management, business strategy, brand management and customer development," Broadbent stressed.
The appointment has been roundly welcomed by the market. Shares in the firm had risen a little over 2% at lunchtime today, despite the group's profit warning.
"We welcome this appointment as... Lewis is a first class executive in our view who has been a great success at Unilever," Shore Capital analyst Clive Black wrote in a note to investors.
Despite the mood of investor optimism, the task ahead is far from easy. There will be no quick fixes for Tesco and it seems likely we can expect Lewis to usher in a significant strategic shift at the group.
The key issue Lewis will face is around Tesco's price positioning. Tesco is caught in no man's land as the battle for share in the UK grocery market rages.
The rise of the discounters, notably Aldi and Lidl, has been a key trend in the sector. The discounters have been stealing share from all those positioned at the value-end of the spectrum - Tesco being no exception. While more upmarket retailers including Sainsbury's and Waitrose have prospered, the frequently referenced bottleneck effect of the economic downturn has seen those in the middle squeezed. And even now the UK economy is in recovery mode, thrifty shopping habits have proven sticky.
As Bernstein Research analyst Bruno Monteyne noted: "Tesco became successful by being everything to everybody and being the fastest at putting down space. That was fine as long as Tesco had limited local competition. Now Tesco faces distinct and targeted local competitors in most of its neighbourhoods. If you want cheap food, there is a better alternative next door - Asda, Aldi, Lidl - if you want great quality the same applies (with) Sainsbury's, M&S, Waitrose. Tesco responded by trying to be (a) bit better at everything but that doesn't change the local trade-off consumers face."
Tesco has responded on two fronts: it has cut prices and it has invested in areas it believes its brand can differentiate itself - notably e-commerce.
Successive periods of declining market share and the loss of sales momentum come as evidence this strategy has failed.
Tesco has struggled to maintain sales densities at its stores and margins have come under growing pressure. The retailer's price cuts have not been deep enough to lure back shoppers who have deserted in their droves for the German discounters.
In contrast to the rest of the UK supermarkets, Aldi and Lidl have stepped up their store-opening programmes. Unlike a decade ago, increased accessibility means shopping at an Aldi or a Lidl is now an option for much of the population. They have also changed their offer to increase their appeal to UK shoppers - stepping up the quality of fresh products and bringing in must-have branded ranges in some categories. The discounters win shoppers over on price; they keep them with smart ranging and an improved quality proposition.
According to Keith Bowman, an analyst at Hargreaves Lansdown Stockbrokers, one of the major strategic questions for Lewis will be whether or not to take on the discounters directly. "The question now will be whether the new chief executive will have the courage to take early aggressive action, potentially going toe to toe with the discounters," he suggests.
If Lewis does significantly step up Tesco's price investment this will no doubt have a negative impact on margin - at least in the short run until volumes revive. In the long run, increasing the price focus of the UK's largest retailer is likely to have a knock-on impact on the rest of the sector, further commoditising FMCG sales in the country and training consumers to shop with a price driven mindset.
This could have some significant implications for Tesco's suppliers. Price negotiations, always a contentious area, could be set to become more ferocious. Rather than looking at how consumers can be convinced to pay more through quality, brand building, innovation or differentiation the discussion may instead focus on price.
But its not all doom and gloom. FMCG executives frequently prefer the value debate to look beyond price - and here Lewis's Unilever background may come to the fore. For many a manufacturer, the idea the value of a product lies in what extra it brings to the table is intrinsic to the business outlook. In this sense, getting consumers to look beyond price and promotion is one of the greatest challenges for the UK FMCG sector.
Lewis's assessment of the price debate will have significant consequences for Tesco - and the UK grocery market in its entirety. Lewis will take up the reins at Tesco in October. The rest of the UK grocery sector will be watching.
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