Investors in Tesco (LSE: TSCO) are feeling much more optimistic than they were just a few months ago. Clearly, a share price that is 30% higher than it was three months ago is a good start — however, the company’s new management team and its revitalised strategy is the major plus for the long-term prospects of the business.
Management Changes
Having replaced its CEO with Dave Lewis, Tesco is also refreshing its other board positions. The latest of these was announced today, with Byron Grote joining the Board as a non-executive Director with effect from 1 May. He replaces Gareth Bullock who will focus on his role as a non-executive Director at Tesco Bank and brings with him a wealth of experience, having been a Director at BP and also having worked with Dave Lewis at Unilever.
Strategy Shift
Clearly, Tesco’s former senior management team was highly skilled and had contributed a great deal to the company’s past success. However, with the departure of Sir Terry Leahy, the company needed fresh impetus and required a new management team that, just as the old one had done previously, was ready and willing to take risks.
However, what shareholders ended up with was a management team that appeared to be somewhat timid and more focused on not losing rather than on winning. In other words, they seemed more interested in Tesco becoming a conglomerate, with various subsidiaries that had nothing to do with being a supermarket so as to reduce risk, rather than focusing on Tesco’s biggest and most important offering: food retailing.
Under the new management team, there seems to be a ‘back to basics’ approach. This is manifesting itself in the company’s strategy, with Dave Lewis and his team keeping things very simple thus far. For example, they have frozen staff pay, reduced the breadth of items that the company stocks, redesigned staff work patters in an aim to improve efficiency, have started to divest non-core assets such as blinkbox and broadband customers, while attempting to use Tesco’s position as the biggest UK retailer to beat rivals on price.
Looking Ahead
Clearly, Tesco’s new management team has not yet done anything particularly leftfield or ingenious: their strategy is refreshingly simple. However, that doesn’t mean that it will not be successful; the calibre of individuals they have recruited to the Board shows that the company remains a retail heavyweight that can attract the best talent around. And, with the UK consumer environment on the up for the first time since 2008, their willingness to take risks seems to be the right strategy given the current trading environment.
Furthermore, with Tesco now trading on a price to book (P/B) ratio of just 1.35 and having the potential to deliver better results than the market currently anticipates, now could be a great time to buy a slice of it. Certainly, it will be volatile and take time to come good but, with a new management team and refocused strategy, it seems to be on-track to deliver impressive gains over the medium to long term.
