The practical problems of fixing Tesco

WHEN Tesco boss Philip Clarke chose the trendy London offices of his new media venture, rather than a supermarket, to present Wednesday’s disappointing annual results, it was no accident.

The chain’s 238 large Extra stores have been a drag on group profit and in Clarke’s eyes the future is in multimedia – selling groceries, movies and music online.

Holed up in a meeting room at online movie-streaming firm Blinkbox, a defiant Clarke is seated on one side of a boardroom table, cleaning a new pair of spectacles.

‘They are buy-one get one-free at Tesco Opticians,’ the embattled chief executive says, predictably. But despite the optical enhancement Britain’s biggest retailer is still struggling to see the results of any turnaround.

Annual profits fell this week for a second year running as investors questioned whether he was the right man with the right strategy.

Clarke has been on the back foot in recent days as second-in-command Laurie McIlwee resigned amid speculation the pair had clashed on strategy. Well-placed sources say any disagreement was on the execution of the strategy rather than on the strategy itself.

This insight raises questions over Clarke’s leadership and his ability to push change through.

So if the strategy is mostly sound, why are customers not responding to Clarke’s initiatives?

The problem lies in implementing the turnaround.

One source said: ‘ Tesco’s latest turnaround plan is almost identical to one from two years ago. Tesco did price drop and price promise and now price reduction on the lines that matter most.

‘It is emblematic that Tesco is returning to price again and shows the challenge is not the strategy it’s the execution and it’s making sure you don’t try to do a lot of things all at the same time. ‘The problem is with the current leadership and ensuring staff are clear about what the objective is.

‘If it is too vague and not clearly communicated then that lies at the top.

‘The firm has lost a lot of experienced executives.’

In retail terms Tesco is a supertanker, employing a whopping 530,000 staff across some 6,784 stores.

Shifting the culture in an organisation of that scale takes time but the key is focusing on improving a few crucial issues rather than a scattergun approach, piling resources into fixing one crisis after another.

In the UK the business was neglected, as former chief executive Sir Terry Leahy f ocused on i nternational expansion.

Staff numbers were cut to the bone, service suffered, stores looked tired and there was a lack of innovation on products.

On top of this Tesco – along with its mainstream rivals Asda, Sainsbury’s and Morrisons – has been squeezed in the middle by cut-price Aldi and Lidl and upmarket Waitrose. Clarke has responded by investing £1bn bringing down prices, revamping stores, and i ncreasing staff numbers.

But the firm continues to lose market share, the turnaround has hit profits and sales have been sluggish.

MCILWEE s ays t he strategy is the right one. On Wednesday he said: ‘Do I feel that we’re doing the right thing in terms of having an Every Day Low Price policy on the key lines that matter for customers? Of course I do. That’s absolutely the right thing for us to do.

‘Do I think we should have a differentiated offer on range and quality and service to allow Tesco to stand out for customers versus the competition? Of course I do.’

He also agrees with the move towards more convenience stores, a key growth area for grocers as shoppers move to smaller, more frequent shopping trips to top up online orders.

In terms of loyalty, rewarding customers is a key factor along with harvesting the data from its Clubcard scheme.

McIlwee said: ‘We’ve got a lot of very large stores and they need to be in the most compelling location for customers to go to. So, there you have it. That’s what I think of the strategy.’

It is thought that 51-year- old McIlwee wants to move away from a finance job to a position as a chief executive, either at a smaller quoted firm or something in private equity.

He leaves Clarke with his hands full tranforming Tesco’s fortunes.

The source said: ‘With an organisation the size of Tesco changing the culture is hard.’

‘The organisation enjoyed many years of success so there has been a sense of arrogance and possibly denial when things started not to work.

‘There are also a lot of young managers, some of whom lack experience and many who haven’t lived through a downturn previously who just don’t get it.’

With investors restless, Clarke has a limited amount of time to ensure managers get his new vision.