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Tesco boss defiant despite 6% fall in profits Tesco boss defiant despite fall in profits another three-year struggle
(about 14 hours later)
Under-fire Tesco boss Philip Clarke said he has no intention of quitting as profits at the supermarket chain's UK business went backwards for the third year in a row. Embattled Tesco boss Philip Clarke has signalled it could take another three years to turn around the struggling UK chain and insisted he would be there to finish the job.
With some investors said to be calling for his head, Clarke insisted he had set out a "clear strategy" and would be there to see it through. "I've got no intention of going anywhere. All my waking hours are spent running Tesco – it's what I love. I'm going to see this thing through." After a second year of falling group profits investors are losing confidence in Clarke whose antidote to decreasing sales has been costly store refurbishments and price cuts judged small beer in comparison with rivals' promises.
Profits at the UK chain fell 3.6% to £2.2bn in the year to 22 February, while at group level profits were down 6% to £3.3bn – the second year of decline. Tesco also announced large writedowns of its European and Chinese chains. It is writing down the value of its European stores by £801m and taking a £540m hit on China. "I think [the UK business] has started to turn," said Clarke, who claimed he was "two-fifths" of the way through the "big and bold plan" launched in the wake of a shock profit warning in 2012. "I've got no intention of going anywhere. All my waking hours are spent running Tesco – it's what I love. I'm going to see this thing through."
In Europe trading profit dropped nearly 28% as its Polish chain battled tough economic conditions and strong competition from the discounters. After failing to make it on its own in China, Tesco teamed up with China Resources Enterprise last year and it has now written down the vale of the joint venture. But there were no signs of recovery in the retailer's annual figures with profits at the UK chain falling for the third year, down 3.6% to £2.2bn in the year to 22 February. At a group level profits were down 6% at £3.3bn as stores in Asia and central Europe were buffeted by local economic and political problems as well as self-inflicted trading issues. The fall in profits was accompanied by £1.3bn of writedowns on the value of its European and Chinese operations. The charge is on top of last year's £1bn impairment on failed US venture Fresh & Easy.
Clarke, who took over as chief executive three years ago, is under pressure to show his plans to revitalise the struggling UK chain, which generates two-thirds of group profits, is working. UK like-for-like sales were down 3% in the fourth quarter, which was worse than the 1.5% fall reported in the previous one. The retailer has spent more than £1bn on store refurbishments, extra staff and revamped product ranges, yet the most recent industry data from Kantar Worldpanel showed Tesco's market share languishing at a near 10-year low of 28.6%. At its peak, in October 2007, Tesco's share hit 31.8%. Analysts and investors are increasingly concerned that Clarke, who has worked for Tesco for 40 years, is not the right man for the job. He has spent more than £1bn on store refurbishments, extra staff and revamped product ranges, yet the most recent industry data from Kantar Worldpanel shows its market share languishing at a near 10-year low of 28.6%. At its peak, in October 2007, Tesco's share hit 31.8%.
In February Clarke announced £200m of price cuts focused on staples such as milk, bread and vegetables although that pledge has since been overshadowed by promises made by Morrisons and Asda. He said prices had come down by an average of 24% and promised another round of price cuts in the coming months. "You'll see more prices coming down in the weeks and months ahead," he said. "This is a business that is struggling and there is no clear sign that management have got sufficiently big plans to turn it around," said one investor. "The calls for a change in leadership are only getting louder."
Tesco will also embark on an "unprecedented" store refurbishment programme this year with 650 stores to get a makeover. Clarke said stores that had already been overhauled were delivering sales uplifts of 3-to-5%. As shoppers turn their backs on big stores Tesco is subletting space to other retailers, including discount department store Original Factory Shop, as well as children's soft-play areas and gyms. In the fourth quarter UK like-for-like sales tumbled 3% – the worst fall since Clarke took over from Sir Terry Leahy in 2011 – and he warned of more bad news to come. Price cuts, fewer promotions and disruptions caused by store refits would all put a "drag" on sales this year, Clarke said. Asked by one analyst if investors could expect no underlying growth for three years, Clarke gave a cautious reply. "No I don't think we are preparing people for that. We are watching the actions of our competitors very carefully and they are far from clear."
Confidence in the UK's biggest retailer has also been dented by a string of senior departures. At the start of this month Tesco announced its finance director Laurie McIlwee would leave the retailer once a replacement has been found. He is the last member of the senior team other than Clarke to have served alongside Sir Terry Leahy on the board. It has been reported that the two men disagreed over strategy but investors had also been critical of McIlwee's financial projections for the business. McIlwee insisted he agreed with the retailer's plans. To win back shoppers Tesco launched the first wave of a £200m price cutting campaign back in February. The cuts are focused on staple foods such as milk, bread and vegetables and the retailer said prices were coming down by an average of 24%. Clarke said shoppers wanted more "stable" prices and promised more cuts to come. "We have always said £200m was the start. We retained the flexibility to do what we thought was necessary, and we will. You will see more prices coming down at Tesco in the weeks and months ahead."
Clarke has already put the brakes on UK store openings telling the City earlier this year that it will open only 700,000 sq ft (65,000 sq metres) of new space this year – half the 1.4m sq ft laid down in 2013. It is a dramatic reduction from the height of the supermarket space race, when it opened 2.5m sq ft of new aisles in a single year, and a sign of the change under way in UK shopping habits. Customers now spend less time and money in big stores and more online and in convenience stores. He has also dropped one his big pledges – a profit margin target of 5.2% which, despite its recent problems, remained the highest in the industry. Shore Capital analyst Clive Black said shoppers increasingly thought the big supermarkets "speak with forked tongue" about prices as despite talk of price wars official figures show food price inflation picking up. "The time has come for Tesco to show leadership on price," he said.
Bryan Roberts at Kantar Retail said: "While the decline in profitability and like-for-like UK sales comes as no surprise, it marks the end of a disappointing year for Tesco...we hope that this is the end of the beginning rather than the beginning of the end for his tenure. He has made some tough but necessary decisions on international in particular, but there is still much to be done, in Ireland and Central & Eastern Europe in particular." Tesco launched a store refurbishment programme in 2012 and Clarke said the 300 stores it had revamped were delivering sales increases of 3%-5%."Where the strategy is in place, it works," he said. It will do another 650 this year which he said was a project on an unprecedented scale for the retailer and would cause some sales disruption. It also sees scope to downsize up to 100 of its biggest stores with space let to other retailers or attractions such as soft play areas. As shoppers turn their backs on big stores Tesco has been introducing trendy food brands such as Harris + Hoole coffee shops and Giraffe restaurants which Clarke said were increasingly making its larger premises a "destination for Sunday brunch". It will take three years to complete the refurbishment of the UK chain.
The £1.3bn international writedown included a £734m hit on the value of its European stores as weak sales in key markets such as Ireland and Poland showed no sign of letting up. After failing to crack China on its own, Tesco resorted to a joint venture last year, sparking a £540m writedown. The problems in central Europe resulted in a 27.7% fall in profits to £238m while in Asia they declined 5.6% at £692m, but with both divisions showing progress the shares closed up 7.5p at 293.8p.
Confidence in the UK's biggest retailer has also been dented by a string of senior departures. At the start of this month its finance director Laurie McIlwee tendered his resignation. He is the last member of the senior team other than Clarke to have served alongside Leahy on the board. McIlwee, who had been criticised by investors for his forecasting skills, but denied that there had been a rift over strategy. At what was his final analyst presentation he joked - to nervous laughter – that he had "two words to say to the City". There was relief when they turned out to be "thank you".