Philip Clarke revealed a number of new objectives for Tesco at his maiden results presentation yesterday. Analysts remain concerned over the widening losses in the US, as well as in China and Japan. Meanwhile Clarke was dissatisfied with the retailer’s performance in its UK home market and revealed plans to improve its performance. Petah Marian reports.
While in his presentation of Tesco’s annual results yesterday (19 April), new CEO Philip Clarke emphasised he was not planning a “new strategy” for the retailer, he did talk through a number of “immediate objectives”.
Clarke insisted Tesco was “building on a great platform” but said there would be “some change”, with plans to keep the UK “strong and growing” and becoming “outstanding” internationally. He also plans to become a multichannel retailer in every market that Tesco trades in, and to apply “group skill and scale” to deliver higher returns.
The recently-appointed CEO was remarkably candid about the things that were “not so good” with the retailer, highlighting, in particular, its performance in its home market.
He said that Tesco’s performance over the past year in the UK had been “below par”. He admitted that the business has “lost momentum” and that it had “not had a great year by its own standards”, which could not be completely attributed to the difficult consumer envirionment.
While he was not pinned down on the specifics on what he plans to do to improve Tesco’s UK operations, he said the retailer needs to “get back to doing things first for customers”, develop a “faster road” to product innovation and deliver “sharper communications to customers”.
Matt Piner, an analyst at Datamonitor’s retail arm Verdict, believes that Tesco’s innovation has “been lagging”, which was, he argues, “what took them to the top in the first place”. He says that many of its initiatives over the last few years have been following, or been in response to, actions by other retailers.
“When they have bought things in, like the Discounters range, for instance, and the price matching scheme, it’s been very reactive, against the discounters, against what Asda’s doing,” Piner said today. “So I think they certainly need to get back to being a market leader there and trying to excite the consumer, because they are falling behind a little bit.”
He also outlined concerns about Tesco’s weaker brand values compared to its competitors. “Whereas Sainsbury’s can turn to their quality, and Morrisons can turn to their fresh food angle, Tesco needs to find its own way.”
Piner suggests that Tesco may have leant too heavily on price, with its use of the now discontinued “Britain’s biggest discounter” line on their marketing, with Piner arguing that the retailer “hasn’t done a lot beyond price in the last year or two”.
The next of Clarke’s list of priorities is his plans for Tesco to “become outstanding internationally”. While the retailer’s international operations provided some 70% of its profit growth for the year, there remain issues in a few countries, most notably the US, with some challenges in both China and Japan.
He said that it was “essential” that losses in Tesco’s US Fresh & Easy division come down but insisted he was confident that it will be profitable by the end of 2012/13. Fresh & Easy’s losses deepened in the last 12 months, which Clarke attributed to the integration of its fresh food suppliers – 2 Sisters and Wild Rocket Foods. However, Clarke argued that having them will lower overheads to the point where the operations will be able to be profitable with 300 stores instead of 400.
Arden Partners analyst Nick Bubb struck a somewhat cynical tone about whether Tesco will be able to turn around the US division in the time-frame Clarke suggested, arguing that it is a “bit of a stretch”.
Bubb also seemed concerned by how Clarke “drew back” from saying what the retailer will do if it does not reach its profitability targets, but added the old joke has been that the division “wasn’t very fresh and it wasn’t very easy”.
He also suggested that a retailer that “claims to be as close to its customers as Tesco claims to be would have gotten it right the first place”.
However, he said that Tesco launched its US operations at a “pretty bad time”, in terms of the country’s economic situation, which “partly explains why it’s struggled”.
For Shore Capital analyst Clive Black, turning around the US business is “key” for Tesco, as at the end of the year, cumulative losses in the division will reach “around GBP700m”.
In terms of its other problematic international division – Japan, Black suggested a disposal may be on the cards, following Clarke’s commitment to not invest further in the country until the retailer can find a way to “win” in the market.
Black said Tesco’s business in Japan is “sub-scale” and has always been so. He added that there would be no way for it to be profitable without a significant injection of capital and management effort.
Bubb, however, argued that a withdrawal from Japan would be “embarrassing”, and that he would not see any point to Clarke closing it “just to make his mark” on the business. He insisted that the issues the retailer faces China is more of a concern.
The retailer originally committed to quadrupling its profit in China before 2014, but Clarke said yesterday that it would be reducing its store opening target in the country. He said it had been more difficult than expected to get prime locations and it has taken Tesco longer than expected to recieve government permission to open its Lifespace malls.
Yesterday, Clarke said the retailer has reduced its target to open some 80 Lifespace malls in five years to 50 at the end of the period.
In the shorter term, the Chinese division did not record a profit during the second half, with the retailer attributing this to financial reforms in the country, and inflation levels which Clarke said have led customers to “tighten their discretionary spending”.
Both Piner and Black suggest the retailer’s issues with developing in the country are “to be expected” and are simply part of doing business in an emerging market.
Piner suggested that the retailer needs to consider other ways of doing things in China, for instance, more local partnerships, different store formats and different areas.
More broadly, Clarke said the retailer will better use its scale in buying and infrastructure. Piner believes that the CEO’s experience in the retailer’s global operations means that if there is “anyone that would be able to come in and revamp that side of the business, you’d hope that it would be him”.
Overall, notwithstanding the concerns over the UK, China and Japan, the analysts were largely impressed by Clarke’s performance. Clarke, Shore Capital’s Black said, would not want to be judged after one month in the role but, the analysts said, “the signs are positive”.