Mammoth loss signals end to the Tesco-era but Drastic Dave’s strategy is the right one
The £6.4bn annual pre-tax loss reported by Tesco – the worst in its 97-year history and nearly the biggest loss in UK corporate history – has signalled the end to an era which saw the brand dominate the British retail scene. However, growth in the supermarket’s like-for-like sales for the first time in four years have paved the way for chief executive Dave Lewis’ renewed focus on the customer.
“You can’t talk you’re way out of something you behaved your way into,” said Lewis. “We’re going to behave our way out of this.”
Lewis’ predecessor Philip Clarke, sought to woo consumers with the expensive modernisation of stores, recruitment of more staff, introduction of restaurants and coffee chains, and invested heavily into services such as Blinkbox and Dunnhumby.
Since Lewis’ arrival last September, he has sold Blinkbox, closed 43 unprofitable stores, consolidated its head offices, made a number of redundancies and addressed a £263m accounting error. He then set about improving the Tesco brand's fundamentals of availability, service and targeted price reductions for customers.
“It has been a very difficult year for Tesco,” admitted Lewis today (22 April). However, his shrewdness has impressed analysts and in early trading following the preliminary results annoucement shares rose one percent.
"Tesco is on the right path. Amid the extensive wreckage left by his predecessors, Dave Lewis has done all the right things, and made all the tough decisions, to put Tesco back on track,” explained John Ibbotson of the retail consultants, Retail Vision. "Most fundamentally, he has changed the retailer’s entire corporate philosophy.”
Tesco has seen a steady increase in footfall, transactions and volumes as reflected by like-for-like sales returning to growth after four years of decline.
“More customers are buying more things at Tesco,” Lewis said, later revealing a series of customer service charts to exemplify the improvement in customer satisfaction across three key metrics (see below).
While such improvements have returned some momentum, it comes amid an ongoing price war by the 'Big Four' supermarkets to stay competitive with the likes of Aldi and Lidl. Although Lewis didn’t announce a fresh round of price cuts he has begun editing the brands it sells under a plan to reduce its range by 30 per cent.
Mike Dennis, retail analyst at City firm Cantor FitzGerald, suggested that to further compete with the discounters Tesco ought to make more reductions in staff.
“Aldi UK today generates twice the sales per full-time employee compared to Tesco UK and is expected to report higher trading profits,” he said.
Yet more changes are anticipated with the arrival of Matt Davies, the former Pets at Home and Halfords boss, who will take on the role of UK chief in June. Beyond improving efficiency and cutting costs, he will have the added task of working with Lewis to decide what to do with all of the excess space in its largest superstores.
Alastair Lockhart, insight director at Savvy believes that crucially, both Lewis and Davis are "leaders of people" and in a company that employs over 500,000, getting the whole of the business behind the strategy is vital to delivering a turnaround.
The outcome of an aggressive shake-up to the marketing function last year is also yet to be realised. Its strategy has for too long tried to compete with all its retail rivals on all fronts.
"Rather than focusing on one segment of the market or demographic it was trying to compete with high end stores such as Waitrose and M&S, it was fiercely fending of the new cut price stores like Aldi and Lidl," adds Jacques de Cock, faculty member at London School of Marketing.
However, this scattergun approach should in time become more focused. not least with the appointment of a new creative agency, BBH, to breathe new life into its strategy.