Tesco PLC’s One Big Mistake

Why things should eventually come good at Tesco PLC (LON:TSCO).

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On paper, Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) should be doing better than it is. True, austerity has tightened shoppers’ belts. The major supermarket chains have lost sales to the cheap n’ cheerful hard-discounters Aldi and Lidl, while upmarket Waitrose and Marks and Spencer have introduced value ranges.

But Tesco has far and away the biggest market share and it has consistently been the innovator of the sector, leading in non-grocery sales, convenience stores, online shopping, loyalty cards, overseas expansion, banking and restaurants. It should at least be holding its own. Its UK turnaround programme, launched after Tesco issued its first-ever profits warning in January 2012, ought to be showing results.

Instead, the company is struggling. The market expects to see a fall in earnings of some 10% when Tesco announces annual results on April 16th. The shares are at their lowest for 10 years.

TescoOne big mistake

It’s hard not to point the finger at bad management. I think Philip Clarke made one big mistake when he became CEO in 2011: he sacked rival Richard Brasher, who ran the UK arm, and took on the job of directly running the UK business himself along with the group CEO role. With crises in the UK and overseas, doing both jobs has proved too much.

There have been several other high-level departures from the cadre of long-serving company executives, including Tim Mason — the marketing director and inventor of the Clubcard who went to run (and then sell) Fresh & Easy in the US — as well as the Head of Asia and the boss of Tesco Bank. It smacks of a management style that brooks no dissent. But there’s only Mr Clarke left standing now…

Last December I pointed out how good companies can go bad through ‘active inertia’, with management who are stuck in old ways of thinking doomed to repeat past mistakes. I mooted that investors may soon lose patience with Mr Clarke — and I think that time has just got nearer.

But still a great company

But investors shouldn’t lose patience with Tesco itself. It’s still one of the world’s largest supermarket chains. Its UK market share has slipped, but commanding 29% of the market when the next nearest has 18% still leaves it in a powerful position.

What’s more, Tesco has historically enjoyed the strongest margins, but has recently relaxed its 5.2% target. It’s a late change of strategy, but one that gives the company tremendous firepower in the supermarket price wars. Even if there has to be a change of Commander-in-Chief, Tesco’s strengths should show through in eventual victory.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Tony owns shares in Tesco but no other shares mentioned in this article. The Motley Fool owns shares in Tesco.

 

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