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Clarke given six months to turn Tesco around

Tesco CEO Philip Clarke, who took direct control of the grocer’s domestic business three months ago, has until the end of the year to convince some investors he can return the UK to growth after four quarters of declining sales.

“Six months is as long as anyone is prepared to wait for some material progress to appear,” said Tim Green, who helps manage more than £24 billion at Brewin Dolphin Holdings Plc, including Tesco stock. “We need to see some signs of progress, there is some impatience in the market.” The retailer gets about two-thirds of sales and profit from its home country.

Clarke will continue to oversee the domestic business “until further notice,” he said today.

The CEO’s decision to stick to direct control of the business differs from that of Lars Olofsson, the former CEO of French competitor Carrefour SA. Olofsson took over the running of that grocer’s flailing domestic business for less than two months last year after ousting the head of the business. Richard Brasher was appointed by Tesco to the new post of UK CEO when Clarke won the role leading the entire company in 2010. Brasher stepped down from the Tesco board in March after the retailer’s share of the UK market slid to a seven-year low and a price-cutting campaign failed to win back customers.

“I want to see a lot more of the focus on the UK because it’s been such a star in the past and it’s rather caught us by surprise how quickly the slowdown has occurred,” said Paul Mumford, a fund manager at Cavendish Asset Management who has £772 million under management.

UK sales at stores open at least a year fell 1.5%excluding fuel and VAT in the 13 weeks ended May 26, the retailer said today. That matched the median estimate of 13 analysts compiled by Bloomberg, and compared with the prior quarter’s 1.6% drop.

Clarke juggled the role of running the UK with visits to seven of Tesco’s 13 overseas territories in the quarter, saying he was too busy running the UK to visit all the regions as he would have otherwise done.

The CEO’s management team spend one day a week in stores working on areas such as staff training, improved layouts and new ranges. He wouldn’t be drawn on the initial impact of the measures or a timetable for turning the business around.

Clarke “needs to make sure he is keeping a tight supervision on the improvement process,” Brewin Dolphin Holdings Plc’s Green said. “There has been an element of u-turn,” he said, given that Clarke established the UK CEO position and appointed Brasher last year. “He didn’t realize quite the extent of the UK weakness strategically.”

Customers are “delighted” with changes made so far, Clarke said today, adding that sales in the week leading up to this month’s four-day Diamond Jubilee holiday reached £1 billion, its biggest-ever week outside of Christmas.

Clarke acknowledged that there was a step-up in coupon activity across the market in the past quarter, though such a policy “isn’t a long-term solution,” he said. Tesco was later than competitors to introduce vouchers to hard-pressed shoppers.

“We need to see sustained like-for-like relative improvement without reliance on these, in our view, blunt and expensive promotion instruments,” said Andrew Kasoulis, an analyst at Credit Suisse in London. Kasoulis has a hold recommendation on Tesco shares.

Sales at stores open at least a year rose 0.5% at Tesco’s international unit, compared with the median analyst estimate of an unchanged performance. Revenue growth at the US Fresh & Easy chain slowed to 3.6% from 12.3% in the prior period, while same-store sales in both the Asian and European units increased 0.4%, Tesco said.

“His job is make-or-break to get the UK right,” said Brewin Dolphin’s Green.

Source : Sarah Shannon - Bloomberg BusinessWeek

11 June 2012
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