Investors buy Tesco’s turnaround plan. But will its customers?
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Version 0 of 1. Dave Lewis has done the easy part: diagnosed Tesco’s failings in the UK and prescribed some back-to-basic remedies, such as chucking out baggage like Blinkbox, the video streaming service. And the new chief executive is plainly determined to give Tesco a cultural cold bath. Shutting the unlovely Cheshunt head office and moving 15 miles to Welwyn Garden City sends an internal message that life will never be the same again. The same applies to the appointment of Matt Davies from Halfords to run UK operations, joining finance director Alan Stewart, a recent arrival from M&S. Outsiders now have all the top jobs. It’s a promising start, no question, and a contrast to the dithering and management burble that characterised predecessor Philip Clarke’s reign. Clarke made a rod for his own back by promising investors that he could sustain an operating margin of 5.2% in the UK. Lewis has made no medium-term financial pledges because restoring competitiveness is his top priority. He cancelled the dividend and invited shareholders to guess when, and at what level, a payment would return. Most must be feeling optimistic. How else to explain Thursday’s astonishing 15% rise in the share price? Aside from a few pennies here and there, investors’ outbreak of optimism on Tesco was sustained into Friday, even in the face of a downgrade of the company’s debt to junk status by ratings agency Moody. A company, of course, can be an attractive recovery stock even when its debt is viewed as not worthy of investment grade. All the same, the Moody’s report looks to be a sober assessment of how far Tesco has fallen and how long recovery will take. “We have downgraded Tesco’s ratings because of our expectation that the structural changes in the UK grocery retail market will continue to challenge the company’s operating performance even with the benefits of the significant restructuring actions,” it explained. Fair comment. Aldi and Lidl will not be standing still. It would be astonishing if either altered their store-opening plans one jot as a result of Lewis’s plan. While Tesco will shut 43 stores, they will be adding. On the price front, Lewis plainly has more to do. He cut prices on 380 branded items by an average of 26% but admitted Tesco’s prices had been “significantly out of line” with major rivals’, a remarkable confession by a company that it is still the biggest in the UK market by a mile. But Lewis can’t throw heavier punches on the price front because he is constrained by Tesco’s balance sheet, where the collapse in profits has undermined debt ratios. One solution would be to raise capital from shareholders via a rights issue. But that has been rejected in favour of the radical cash-conservation plan – no dividend, a deep cut in capital expenditure and an end to defined-benefit pensions for staff. The open question, though, is whether that package of savings provides enough scope to throw more goodies at customers. Lewis’s hope, it seems, is that sales will stabilise quickly and that deeper price cuts can be delayed until the benefit of the cost-saving programme arrives. He has added 6,000 staff to improve service, and sales improved over Christmas (like-for-like sales were down only 0.3% in the six-week period). But if trading slumps again – to, say, the -4.2% seen in the third quarter – Lewis will be up against it. He is attempting to juggle many balls: keep a lid on debt, sustain staff morale after their pension shock, deal with redundancies, raise a decent sum by selling data analytics business Dunnhumby, and overhaul relationships with suppliers. But the ball that he cannot afford to drop is a better offer for customers. Shareholders be warned: if deeper price cuts are required to get the sales line moving, the threat of a rights issue will be back on the table. A one-notch downgrade by Moody’s is tolerable; it was expected. But two notches would require a rethink. Car sales about to hit bump in the road The British appetite for a new motor seems to know no bounds. Last year the biggest number of new cars was sold for a decade. But can the roaring demand at home persist? All the indications suggest not. In the past couple of years, the UK market has seen a huge release of pent-up demand after consumers put off major purchases during the financial crisis. As soon the outlook became rosier and consumer confidence improved, sales rebounded. At the same time, a proliferation of cheap finance deals has made a new car that bit more affordable. But 2015 is likely to be different. For a start, we could see interest rates rising for the first time in what will be more than six years. With higher mortgage repayments on the cards, homeowners are likely to be less inclined to splash out. Then there’s the general election to consider, and the great uncertainty a potential new government will bring. The low oil prices are relevant too. Sales of alternatively fuelled vehicles increased by more than half last year as people chased lower fuel costs. Will that be so relevant now that pump prices are falling? All this suggests sales growth will be more modest this year, if it does not evaporate entirely. Last year was good for carmakers in the UK too – Rolls-Royce, albeit owned by BMW, sold more Wraiths, Ghosts and Phantoms around the world than at any time since it was founded more than a century ago. But car manufacturing, an area of the economy held up as an example for British industry by the current government, faces its own bumps in the road. About 80% of cars rolling off UK production lines are exported, with around half going to other European countries. The market in Europe has started to rebound, but less than hoped, and recovery could be snuffed out if crisis resurfaces in the eurozone. In China, about one in 18 people own a car, and in India it’s about one in 50. Manufacturers may have to look further ahead and further afield. Downloads down, hardbacks back Rumours of the death of the book have been exaggerated, it seems. Sales of ebooks, the supposed nemesis of the traditional tome, have fallen off, according to Foyles and Waterstones, as literature lovers seek out something they can flick through. This appears to be one of the rare examples where a groundbreaking technology ends up being supplanted by its predecessor. Foyles, the London-based chain, said physical book sales had risen 8% over Christmas while Waterstones revealed a 5% increase in December. The figures reflect a wider drop-off in the growth of tablet computers. But it also shows the lasting appeal of traditional gifts. How does one wrap up a download? Would you browse an e-reader in the bath? Just as newspapers continue to be printed decades after the television and the radio entered people’s homes, hardbacks and paperbacks still have their place – and it looks like it’s bigger than many had forecast. |