Tesco's Clarke Faces Tough Start as CEO

Tesco Plc Chief Executive Officer Terry Leahy, who said yesterday he will step down next year, came to dominate the U.K. retail market. He’s leaving the rest of the world and a crowded domestic industry to his successor.

Under Leahy, Tesco doubled its market share and became the world’s fourth-biggest retailer. A money-losing U.S. business and slowing U.K. grocery sales mean Phil Clarke’s honeymoon period may be short lived when he takes Leahy’s job in March.

“The new management is right for where the business is going, but we’re worried about the headwinds in the U.K.,” said Margaret Lawson, who helps manage about 500 million pounds ($720 million) in stock, including Tesco, at SVM Asset Management in Edinburgh. “The U.S. has not been a success. The concept is totally unproven and there are a lot of doubts.”

In the U.S., Clarke will need to stem losses that have totalled 369 million pounds since Tesco opened its first Fresh & Easy store in 2007. At home, where the retailer’s share of its domestic market has plateaued at about 30 percent in the last five years, the new CEO’s main priority will be to maintain sales growth in the face of a slowing food retail market, more openings by competitors and falling food price inflation.

Tesco shares fell 2.4 percent yesterday and have dropped 7.1 percent in 2010. They’ve advanced in 10 of the years of Leahy’s tenure and have more than tripled since he took the helm in February 1997, compared with a 27 percent gain in the Bloomberg Europe Food Retailers Index.

Turkey, India

The choice of Clarke as CEO “highlights the growing importance of Tesco’s international division,” and likelihood of little change in its oversees strategy, according to Chris Hogbin, an analyst at Bernstein Research. Liverpool, England- educated Clarke has headed the retailer’s operations in Asia and Europe since the end of 2003. U.S. chief Tim Mason, 52, will also take on the role of deputy CEO, Tesco said yesterday.

Clarke, 50, has overseen the development of stores in Turkey, where Tesco plans to increase space by 30 percent this year, and a franchise agreement in India with Tata Group’s Trent Ltd., among others. The retailer now operates in 13 markets outside the U.K., representing more than half its selling space.

International markets will drive Tesco’s “long-term earnings growth” as U.K. growth remains subdued, according to analyst Sam Hart, an analyst at Charles Stanley & Co.

Leahy, 54, defended his decision to step down before Tesco has eradicated losses in the U.S. The 145-store Fresh & Easy chain made a 165 million-pound loss last year, and that won’t be “much lower” this year, the company said in April.

‘Extremely Difficult’

He said he was certain the business would be a financial success when the economy recovers.

Even so, analysts including Mike Dennis at MF Global Securities said the U.S. economy can’t be entirely to blame for three consecutive years of losses.

“They made a decision after five years of research to enter the U.S. and they’re still incurring significant losses,” Dennis said. “The current situation they are in is extremely difficult. It’s not an easy time for Phil Clarke to take over.”

In the U.K., the food retailing industry is “heading for its most difficult time in many years,” according to Evolution Securities analyst David McCarthy. Store opening programs are doubling, comparable sales are falling and discretionary income is declining, said McCarthy, who rates Tesco “reduce.”

Tesco’s market share held at 30.6 percent in the three months through May 16, according to Kantar Worldpanel.

“Phil is very experienced and has been very successful at Tesco, but he has the toughest act to follow,” McCarthy said. “In losing Terry, Tesco is losing its best player and therefore the team is weakened. The competition will be happy.”

To contact the reporter on this story: Sarah Shannon in London at sshannon4@bloomberg.net.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.