Marcus Evans Group | Worldwide Headquarters | American Offices | Latin America | European Offices | African / Asian Offices

Every little bit hurts: share slump is not the only thing to worry Tesco

It’s a very long time since the supermarket giant has had to be so candid about its mistakes

It wasn’t just the profits warning that inflicted a 16%, or almost £5bn, dent in Tesco’s stock market value. It was chief executive Philip Clarke’s admission that “long-standing business issues” must be addressed urgently. He is happy with Tesco’s prices, but that’s about all he can find to cheer. Quality, range and service must improve, he says.

It’s a very long time since a Tesco boss confessed to deep corporate weaknesses. For dramatic impact, go back to the 1970s when Ian (now Lord) MacLaurin ditched green shield stamps, vowed to rid Tesco of founder Jack Cohen’s pile-it-high approach and embarked on a huge programme of modernisation.

That overhaul worked in spades: it launched Tesco’s transformation from UK also-ran to the world’s third-largest supermarket, a feat achieved with barely a hiccup under MacLaurin and his successor Sir Terry Leahy.

Now Clarke, who earned his Tesco spurs on the Far Eastern front, finds trouble at home. No wonder investors are alarmed: when profits stall at retailers the size of Tesco (which has 30% of the UK grocery market), regaining top gear tends to take years.

What happened? The short answer is that competitors in the UK have become smarter. For about two decades, at least one rival could be relied upon to shoot itself in the foot. Asda almost collapsed in the early 1990s; sleepy Sainsbury’s was slow in building big hypermarkets later the same decade and then performed so badly it was regarded as a near basket-case; and Morrisons suffered severe indigestion after buying Safeway in 2004.

These days Tesco’s rivals have learned Tesco’s best tricks – such as how to use data from loyalty cards – and added a few of their own. As Clarke put it, the competition unleashed a “barrage of coupons” over Christmas while Tesco stuck with its Big Price Drop campaign. The coupons won.

Meanwhile, Tesco’s leadership in non-food lines, such as clothing and electrical goods, now looks less of an advantage. To the surprise of many, fashion turns out to be popular among internet shoppers.

Online non-food sales are booming and Tesco’s collection of giant hypermarkets suddenly appears unwieldy and dated; eBay and Amazon are now direct rivals. The giant stores are not white elephants, insists Clarke, but he “wouldn’t want a great many more of them”. For sceptics, the supermarket industry has already opened more floorspace than is good for its long-term economic health.

Clarke’s diagnosis was also detailed: not enough staff, queues too long and too many under-stocked shelves. These problems, in theory, are easy for a retailer as rich as Tesco to fix: throw money at the problem.

That is the plan, with more – and better trained – staff to be recruited. The cost, though, will frighten shareholders who hadn’t considered the Tesco profit machine might become unpredictable. There are also unanswered questions. The Big Price Drop – at a cost of £500m – received a Big Shoulder Shrug from shoppers. Why?

Tesco seems baffled. Perhaps customers, having been exposed to elaborately-engineered buy-one-get-one free offers, are now cynical about all supermarkets’ price claims. Perhaps Tesco, by concentrating its marketing around Clubcard loyalty points for years, confused the punters by changing tack. Clubcard points were halved when the Big Price Drop was launched. Did shoppers regard that as sneaky?

Behind Tesco’s Christmas woes, however, is the suspicion that management is over-stretched. The company is enormous. It employs 492,000 people in 14 countries; in China alone it is planning to open 50 giant shopping malls by 2016. Is it a coincidence that the UK setback follows setbacks in far corners of the empire?

The Japanese operation is up for sale. Fresh & Easy – an adventure in the US, traditional graveyard of UK retailers – has caused problems since its launch three years ago: the cash poured into the F&E business plus accumulated losses are £700m and counting – but Tesco maintains it wants to stick with the project. Tesco Bank, the financial services venture, has become bogged down and is yet to launch current accounts and mortgages.

There has also been churn in management. Andrew Higginson, the former finance chief and head of Tesco Bank, was a disappointed candidate for the top job and departed soon after Clarke’s promotion.

Chairman David Reid, another long-server at Tesco, also left last year to be replaced by an outsider, Sir Richard Broadbent, Barclays’ deputy chairman. Marks & Spencer has poached Laura Wade-Gery, boss of

The reaction within Tesco to Clarke’s big announcement will be fascinating. He was careful not to criticise his predecessor but, by definition, “long-standing issues” do not develop in a year.

By implication, he’s saying Tesco was under-invested and off the pace in the UK. How will that message be received by executives? Will they rally to the flag, or mutter that the share price never fell 16% in a day on Sir Terry’s watch?

The best guess is that Clarke will succeed – after all, Tesco will still make £3.7bn of trading profit this year so, at worst, this is still only a semi-crisis. But there are no guarantees. © 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