Comment: Clarke may face a tough road ahead

No comments

The fact that Tesco has announced a drop in profits this morning hasn’t come as a surprise to many – and yet that doesn’t make the news any more comforting to investors.

The fact that Tesco has announced a drop in profits this morning hasn’t come as a surprise to many – and yet that doesn’t make the news any more comforting to investors. Today’s announcement marks the company’s first fall in profits since 1994 – due in part to a slowdown in UK sales and the cost of its £1bn turnaround plan.

Tesco’s international business is also facing increased pressure from the eurozone crisis and political uncertainty (in Asia alone, like-for-like sales fell 1.4% and trading profits by 1.7%), and its Fresh & Easy subsidiary in the US also performed below expectations. As a result, although like-for-like sales have climbed 5.2% for Tesco in the US, Fresh & Easy still remained in the red, reporting a trading loss of £74m.

Some would argue that the decision to soldier on with the company’s Fresh & Easy brand has been one of its most serious mistakes to date, since this part of the business has become something of a high-profile anchor around Tesco’s neck. As the company’s new CEO, Philip Clarke may have missed a golden opportunity to do some serious housekeeping in this regard.

In fact, getting rid of Fresh & Easy could have been Mr Clarke’s chance to show shareholders that he really means business. Those who invest in companies like Tesco tend to be returns-based, rather than emotion-based, when it comes to their portfolios, and Philip Clarke’s requests to ‘trust him’ with the company’s future will not be enough to sustain investor confidence forever.

At a time when Sainsbury’s is posting better than expected sales growth (like-for-like sales excluding fuel rose 1.9% in the three months to 29 September) and Asda is reporting a like-for-like sales increase of 2.2%, Tesco really needs to take the gloves off if it wants to maintain its place as the bellwether of UK retail. So far, investors have not seen much evidence of the tenacity that will be needed to achieve this goal.

With some dark clouds still stubbornly on the horizon, not just in terms of Fresh & Easy, but also with the company’s underperforming operations in Central Europe and Asia, Tesco is likely to face a tough road ahead. Philip Clarke has taken a bold step in choosing to head this ship – but it’s the investors who will need to hold their breath whilst they wait for him steady it.

Mr Clarke has clearly inherited a tough situation from his predecessor, Sir Terry Leahy, and the company also happens to be right in the middle of a £1 billion investment programme. However, investors are not known for their patience. There is no doubt Philip Clarke has the skills and experience to make it at Tesco, but the next set of results will need to show a marked improvement in Tesco’s core business, as well as proof of the much-anticipated strategic turnaround that investors have been promised.