Tesco’s ambitions earthed by UK retail reality

January 13, 2012

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

When Philip Clarke took over from the Sir Terry Leahy as Tesco’s chief executive in March 2011, he seemed to have one of the sweetest corporate inheritances around. The company was strong in its British home market and growing well elsewhere, although the U.S. expansion remained a work in progress.

But the Clarke era has seen five consecutive quarters of declining like-for-like UK revenues at the once-almost-almighty retailer. The latest announcement, of a 2.3 percent decline (excluding petrol) over the Christmas 2011 trading period, was a shock. It caused a 13 percent drop in the share price on Thursday.

It’s tempting to think that Leahy left Tesco in less good shape than it appeared from the outside, or that Clarke has mucked things up. Is the company’s strategy – low costs and a steady expansion of formats, product lines and total retailing space – flawed? Was Leahy more charismatic and less efficient than it appeared? Does Clarke lack the inspirational touch?

All of these things may be true. And Clarke can be held responsible for the 2011 price cuts of 500 million pounds, the equivalent of 20 percent of last year’s UK trading profits. But the new man can hardly be blamed for a weak UK economy or competitors who have been strengthened by learning from Tesco. And final judgment on Clarke’s initiative should wait for the end of the full programme for UK revival, which includes investments as well as price cuts. Meanwhile, Tesco’s longstanding effort to build up sales of general merchandise inevitably makes the company more cyclical.

Clarke’s Tesco may always suffer in comparisons to the Leahy era. Such has been the success of the company over the last two decades, it is so big in the UK that profitable market share gains are increasingly hard won. And while its international markets offer higher growth, they also present more challenges. But Tesco’s model is not broken and it is important to note that total sales – in the UK and overall – continue to advance. The Leahy legacy is intact.

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