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The trouble at Tesco

Christmas 2011 will be seen as a significant moment in Tesco’s history – investors haven’t heard the boss speak this way in decades

In the style of a celebrity shoplifter, Tesco’s management has confessed to “long-standing issues”.

Philip Clarke, new-boy chief executive, let it all spill out. “We’ve driven productivity a bit too hard. We’ve run hot too long,” he said. On fresh food, “we’ve been chasing our tail”. He wouldn’t want to describe big out-of-town hypermarkets as “a white elephant” but they are a “less potent force” and “we wouldn’t want a great many more of them”. “It’s this thing called the internet,” he said. The solution is an immediate “step-change” in performance across “quality, range and service”. “I’m sorry it has come to this, but cheese-paring away is not going to do it.”

Investors haven’t heard a Tesco boss speak this way in decades. The last time was perhaps the 1970s when Ian MacLaurin ditched green shield stamps and embarked on a massive modernisation programme. That period was marked by tit-for-tat price wars between supermarkets and the market suspects something similar could happen again. A wounded Tesco is a dangerous beast. Tesco’s share price has plunged 14% but, at 9.45am, Morrisons was also down 7% and Sainsbury’s by 6%.

Christmas 2011 will be seen as a significant moment in Tesco’s history. When Clarke took over from Sir Terry Leahy a year ago, the handover was presented as a seamless transition – one risen-through-the-ranks Liverpudlian taking over from another. Clarke himself talked about evolution rather than revolution.

Ignore that version. Clarke is not saying so bluntly but he is implying that Leahy’s reign, or at least the later years, should be reassessed. By definition, “long-standing issues” don’t develop in a year. And, indeed, Leahy signed off a year ago with the worst trading figures of his spell at the top.

What’s gone wrong? Did Tesco become too complacent? Was it too happy to believe it had won the “race for space” in the UK and think the business could be treated as a cash machine? Did management concentrate too much on overseas expansion? Did Tesco make its UK customers addicted to Clubcard loyalty points? Is that why the Big Price Drop was greeted with a Big Shoulder Shrug by customers?

The answer to most of those questions would seem to be “yes”. The unanswered question for investors is how much Clarke’s “step change” will cost. The group has said it has spent £500m on the Big Price Drop and Clarke now wants to condense three years of planned improvements into one. Expect to see heavy investment to improve the quality of the online delivery service (currently dreadful, in my experience). The group hopes to avoid a fall in its UK profits but concedes that this is a possibility.

One of the big certainties of UK retailing – that Tesco’s profits rise whatever the weather – can no longer be relied upon. One Tesco shareholder, a chap called Warren Buffett, is fond of saying that’s it’s only when the tide goes out that you see who’s been swimming naked. It would be wrong to say recession has exposed Tesco as naked – it will still make £3.7bn or so in profit this year and remains an immensely strong company – but it needs to learn some new strokes.

More later in the day as Clarke continues his confessional … © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds