Jon Copestake, retail analyst at The Economist Intelligence Unit, comments on the news of Tesco announcing a 91.9% plunge in pre-tax profits to £112m for the first half of the year.
If Dave Lewis wasn’t considering radical action when he began in his role as Tesco CEO, then he certainly will be now. A 4.4% decline in like-for-like sales is, in many ways, more significant than the 92% decline in profits given the investment the firm has been making to halt its decline.
The bad news doesn’t seem to have an end at present. The current decline comes as Tesco concludes an internal investigation into a £263m profit overstatement. Tesco’s like-for-like sales fall also comes as the firm sits bottom of a customer satisfaction survey, despite an £800m investment in better stores and services by Philip Clarke, Lewis’s successor. To top things off Lewis will have to face the future without the chairman Sir Richard Broadbent, who is stepping down in light of the accounting scandal.
If there is a silver lining for Tesco, it’s that Lewis will no doubt now have carte blanche in engineering a turnaround. As an outsider, he comes in unencumbered by the firm’s previous mindset and has a clean slate to work from with the blame for the current malaise firmly directed at Lewis’s predecessors.
It’s also worth remembering that, despite everything, Tesco still managed to turn a quarterly profit and it remains the largest retailer in the UK as well as one of the four or five largest globally. There is a precedent here, with Georges Plassat at Carrefour delivering a quick turnaround by exiting a host of foreign markets to refocus on its domestic share. Rumours are already circulating of an Asia spinoff for Tesco, to release funds for UK investment. This will no doubt deliver short-term gains, but may be a decision that comes back to haunt Tesco (and Carrefour) in five or 10 years’ time as Asian market growth continues to outpace that of Europe.
Jon Copestake is a retail analyst at The Economist Intelligence Unit. This is a personal blog and views expressed are his own.
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