Timing is everything in life. And few people will be feeling that sentiment more this week than Sir Terry Leahy, the former chief executive of Tesco, and his successor Philip Clarke. While Leahy stepped down from the role in March to a chorus of approval for his tenure, Clarke’s first six months in charge have been marked by the group’s worst performance in the UK in two decades.
The retailer said its UK like-for-like sales, excluding fuel and VAT, dipped 0.5% in the six months to 27 August. Sales were down 0.9% in the second quarter. Clarke has wisely not looked to lay the blame solely at the door of the economy, but did point to “subdued demand in the UK, particularly in non-food categories”.
Tesco’s sales were the most high-profile casualty of a difficult week for the UK retail trade. Although Sainsbury’s like-for-like sales increased in both the second quarter and the first six months, some in the City have questioned the performance of the retailer’s underlying business. Meanwhile, UK chocolate manufacturer and retailer Thorntons reported a fall in first-quarter revenue on the back of lower in-store and commercial sales.
All of this is against the backdrop of a UK economy where growth has been revised down to just 0.1% in the second quarter, as companies feel the effect of a fall in consumer spending. There is now the very real risk of the country tipping into a second, deeper and more painful recession.
Meanwhile, there is little sense that the politicians at the heart of this crisis from Washington to Berlin have a grip on the means to bring about a global revival. While they play Nero, Rome – as well as any number of other European capitals – faces the flames.
Business therefore must find its own way out of the gloom. This week Willie Walsh, chief executive of British Airways’ parent company, argued that conditions were not as bad as portrayed, and said he had “a very real concern that we are talking ourselves into recession”.
Sainsbury’s chief executive Justin King also tried to be his usual effusive self, insisting there was too much “gloom and doom” around. He claimed next year’s Olympic and Paralymic Games, and the Queen’s Diamond Jubilee celebrations, would lift consumer confidence in UK, even if, at the same time, he conceded economic conditions were unlikely to improve.
Nevertheless, when you scratch below the surface there remain compelling reasons to be optimistic. Above all, this recession is not turning great businesses into fragile ones. This recession is exposing weak business practices, even amongst some of our better run enterprises. The groups that ride out this storm will be the ones that take the necessary action to meet this challenge head on and recognise this can no longer be “business as usual”.
To Clarke’s great credit he has acknowledged where this spotlight has shone most brightly on Tesco and there are already plans to revitalise its non-food offering, while news of its Big Price Drop could help it regain the initiative with the consumer.
Let’s not forget, Tesco remains one of the UK’s success stories abroad. Okay, it has decided to offload its business in Japan but its Asian business reported a 12% hike in sales to GBP5.6bn, with profits up 18% to GBP292m. Particularly impressive were the Chinese and Thai operations. There were also increases in Europe where sales were up 8%, despite the tougher conditions on the continent. And, if you ignore noises by some doom-mongers, you’ll see losses from Tesco’s Fresh & Easy division in the US are falling.
“We believe that Tesco is moving in the right direction in the UK, it has a demonstrably meaningful and contributing international business. In the UK, Tesco is seeking to make it more competitive and not just through pricing,” wrote analyst Darren Shirley of Shore Capital.
That sentiment was echoed across the city as Tesco’s share price held firm despite the disappointing news. And, though Clarke may have wished for an easier baptism into the CEO role, he most surely has the tools and the opportunity to create a lasting legacy of his own.