Fresh produce shows the way

THE age of hubris and private jets at Tesco looks to be over. The results delivered by new chief executive Dave Lewis may look horrendous, with a big pre-tax loss, but they also show a company determined to eradicate the past.

The most worrying aspect of the shopping list of errors is the disclosure that, despite the Deloitte investigation last year, not all the bad stuff was uncovered.

The overstatement of profits climbed from £263m to £326m. A trawl through some past years and the Irish offshoot produced the higher figure.

Similarly, a hair-shirt approach to the way the company does its stocktaking has produced a further £600m of write-downs mainly from the nonfood area with clothing and TV sets among the offending items.

The biggest write- off of all, the £4.7bn charge taken against the property portfolio, also recognises a reality at a time when Tesco is dramatically curtailing investment in out-of-town superstores. At a time of acute shortage of land for housebuilding in Britain there must be hope that eventually some of the write-offs could evaporate.

One only has to look at how J Sainsbury is leveraging some of its London stores, by building apartments above the shops, to realise there are huge opportunities for land owners.

So what does the big loss of £6.4bn tell us about Tesco’s future? It suggests that Lewis is very much aware of a new reality in grocery shopping. In an age of falling food prices, margins will remain under pressure in the coming years as Aldi and Lidl press their luck. It was always thus, however, with no-frills grocers Kwik Save, Fine Fare and others challenging the incumbents in an earlier era before fading away.

What can be done with retailing smarts is already evident in fresh produce where Tesco has turned a drop in sales of 11pc into growth of 4pc by simply retuning the buying and the supply chain. If Lewis can manage the same in other parts of the business, the negative samestore sale performance, across the group, could soon be reversed.

One of the bigger tasks facing the former Unilever executive is what to do about the company’s £8.6bn debt mountain. Some City analysts urge the simple solution of selling off surplus bits of the enterprise including the valuable Asian operations. That certainly would provide an immediate boost but would be a longerterm mistake. The recent history of Marks & Spencer tells us of the futility of selling overseas operations for short-term benefits at home.

With its 30pc or so of the UK market place Tesco may still have room to grow, but it is not enough. The real opportunity is overseas and it has done remarkably well in Korea, Thailand and elsewhere – notwithstanding changes in the rules governing retail opening times and political disruption.

Sensible investors think long-term and the new management team deserves time to reorganise. It should not be harried into shrinking a potentially highly profitable overseas empire.

East wind

FOLLOWING in the steps of an industrial giant is a challenge. And John Rishton has always lived in the shadow of his predecessor Sir John Rose, one of the architects of RollsRoyce’s transformation from secondline aero engine-maker to a genuine rival to GE and Pratt & Whitney.

The power of the brand and the engineering skills was demonstrated only last week when Rolls shoved US competitors to one side by becoming the engine of choice for the fastgrowing Emirates Airbus 380 fleet.

Aside from this victory, Rishton’s period at the top has been characterised by three profit warnings and radical re-organisation. Not surprisingly, shareholders have been anxious and the quiet way chairman Ian Davis, formerly of McKinsey, set about finding a successor must be applauded. He has alighted upon one of Roll-Royce’s non-executives, Warren East, an engineer responsible for building ARM into one of Britain’s few high-tech powerhouses. Under his tutelage, the shares of ARM recovered from a pound after the dot.com crash to £18.

It is always a good sign when the arrival of a new chief executive causes a spike in the share price.

No disrespect to Rishton but this was change at the top that was badly needed.

Rail card

ON a day when ‘ high-frequency’ trading is in the spotlight ( see Michael Lewis interview, page 83), Gatwick airport has decided to get in on the act. It announces a fleet of new trains that ‘signal the start of Gatwick’s improved high-frequency rail service’.

The airport is promising to double capacity within the next five years with a train leaving London for Gatwick every three minutes assisted by new track and signalling.

All just in time for Sir Howard Davies’ post- election decision on whether Heathrow or Gatwick gets a new runway.