Lewis battles the demons
DAVE Lewis doubtlessly has been looking forward to his moment in the sun after turning around the Tesco tanker. He has delivered a strong rise in profits at both the operating and pre-tax levels, reduced debt and posted a dividend as the scandals of the recent past move off the balance sheet into the law courts.
But the former Unilever executive ought to recognise the importance of brands better than anyone. Customers have taken to the Willow Farms brand only to discover it is not what it seems. It may sound like something straight out of The Archers on Radio 4, but the brand has become associated with chicken produced on a large scale in sub-optimal conditions which until very recently was described on the Tesco website as ‘hand reared.’
Price is important to the public, but shoppers have a right to feel cheated when they learn that the rooster in their oven bears minimal resemblance to the brand image they were sold.
The sensitivity of chicken production to British consumers was illustrated earlier this year when it was suggested that a freetrade deal with the United States might result in us being exposed to chlorinated chicken. To some consumers that might be preferable to some of the disturbing images seen from Willow Farms producers.
Back then to the numbers. Lewis has demonstrated that by focusing on costs, supplier relations and narrowing grocery ranges it is possible to stay ahead of Lidl and Aldi and managed a 2.1pc lift in likefor-like sales in the first half. The goal of former boss Sir Terry Leahy was that overseas profits would one day match those in the UK, making Tesco the first UK food retailer to conquer the world.
That hasn’t quite happened, thanks to the failure of Fresh & Easy in California, the cut and run from Japan and Lewis’s decision to reduce borrowings by selling its South Korean arm. Given the current uncertainty on the Korean peninsula, Lewis might want to consider a job at the Foreign Office.
Part of the recovery is based abroad, with Central Europe and Asia delivering more than 25pc of operating profits. Diversifying with more overseas investment might be better in the long run than buying Booker, which has run into a regulatory storm.
There is another mystery about the Tesco results. How did the grocer manage to massage down the pension fund deficit from £5.5bn in February this year to £2.4bn?
Interest rates have bottomed out and therefore the discount rate used to calculate pension liabilities may improve. But someone somewhere is making heroic assumptions. BT, BAe, Tata Steel and dozens of others will be ringing Dave for the secret formula. Sir Philip Green may be asking regulators for a refund. Housing choices COnFIDEnT policy announcements emerged from the Tory Party conference on housing. The Treasury is putting up an extra £10bn for Help To Buy and Downing Street has found £2bn for affordable housing. All very laudable, but if the Government really wants a housing revolution matching that in the 1950s and 1960s, it would have been better to have put money behind affordable schemes.
As useful as Help To Buy to people with above average incomes is, all it does is create more demand when what is really wanted is supply. The main beneficiaries of Help To Buy are builders. It fuels higher prices, rather than raise production, and makes top executives, many of them holding substantial share stakes, ever richer.
Posh estate agent Savills estimates an extra 100,000 homes are needed a year to impact on affordability. If all the money in the pot were to go to affordable housing then Theresa May and the Tories could genuinely put the kibosh on Labour’s ridiculous rent controls. Rates pause BAnK of England interest rate decisions are almost always driven by data rather that instinct. Governor Mark Carney clearly wants to start normalising rates amid concern about consumer credit.
But the economy isn’t sparking, according to the latest purchasing manager surveys. Together, the composite of manufacturing, construction and services shows a narrow rise to 54.1 from 54, but is still in expansion territory.
That may be not enough of a reason for the Bank to rush out a rise in november and risk an adverse reaction.