Tesco Slumps as Retailer Slashes Dividend 75% on Forecast

Aug. 29 (Bloomberg) –- Bloomberg’s Manus Cranny reports on the U.K.’s biggest grocer issuing a profit warning. He speaks on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

Tesco Plc unexpectedly slashed its dividend and reduced investment as the largest U.K. retailer was squeezed between German discount chains and upscale stores such as Waitrose, driving the stock to the lowest in almost 11 years.

Dave Lewis, the 49-year-old manager from Unilever who was named Tesco’s chief executive officer when Philip Clarke, 54, was ousted last month, will step into the job next week, one month earlier than planned. Tesco cut the interim dividend by 75 percent, reduced capital spending plans by 16 percent and forecast profit this year of no more than 2.5 billion pounds ($4.2 billion), compared with the 2.7 billion pounds estimated by analysts.

Tesco, where Britons spend one in every seven pounds, lost market share under Clarke’s tenure to Aldi and Lidl, which offer cheaper products. Today’s measures are designed to give Lewis, who Tesco said will consider all options for creating value, the cash needed to turn the business around, said a person familiar with the company’s strategy.

“Lewis will have to implement some radical changes to restore Tesco to its former glory,” said Bryan Roberts, an analyst at Kantar Retail in London. “Tesco is not doing badly because Aldi is doing well; Aldi is doing well because Tesco is doing badly and its problems are self-inflicted.”

Photographer: Simon Dawson/Bloomberg

A customer pushes a shopping cart past signs displaying goods at reduced inside a Tesco Extra Supermarket, operated by Tesco Plc, in London. Close

A customer pushes a shopping cart past signs displaying goods at reduced inside a Tesco... Read More

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Photographer: Simon Dawson/Bloomberg

A customer pushes a shopping cart past signs displaying goods at reduced inside a Tesco Extra Supermarket, operated by Tesco Plc, in London.

Share Decline

The shares traded 5 percent lower at 233.95 pence as of 11:34 a.m. in London. The intraday decline was the steepest since Jan. 12, 2012, when Tesco cut its profit outlook. The stock has dropped every year of Clarke’s tenure, leaving the company with a market value of 18.7 billion pounds.

While it was the Tesco board who made today’s decisions, Lewis has been in contact, the person familiar said. Today’s announcement doesn’t mark a turnaround in strategy, merely giving Lewis maneuver room for his own review of the business.

“This shows us Lewis is already working behind the scenes and he wants to get all the bad news out first,” said Bruno Monteyne, a former Tesco executive now working as an analyst at Sanford C. Bernstein in London. “Things are bad and he is creating a sense of urgency. That way, when he presents his new strategy later on, nobody will get upset about the dividend cut.”

Tesco will reduce spending in areas including information technology and the store refurbishments.

Zumba Workouts

Under Clarke, who will also leave the board, the company spent more than 1 billion pounds to remake stores, adding children’s playgrounds, artisan bakeries and Zumba dance classes to lure back customers. Clarke also spent on technology products such as tablets and building the company’s online media.

Source: Unilever via Bloomberg

Dave Lewis, incoming chief executive officer of Tesco Plc. Close

Dave Lewis, incoming chief executive officer of Tesco Plc.

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Source: Unilever via Bloomberg

Dave Lewis, incoming chief executive officer of Tesco Plc.

That failed to stem the decline: Tesco had its worst sales decline in more than two decades, when revenue dropped 4 percent in the 12 weeks to Aug. 17, and market share fell 1.4 percentage points to 28.8 percent, Kantar Worldpanel data showed this week. Meanwhile, Aldi and Lidl have maintained their record shares of 4.8 percent and 3.6 percent respectively, thanks to the half of U.K. households who shopped at either outlet.

While Tesco said in February it would invest more than 200 million pounds this year in permanently lower prices and abandon overly complex promotions, Clarke resisted some analysts’ calls for a bigger price war. He insisted that Tesco could not beat the discounters purely on price, and that being different and good value would lure customers back.

‘Many Hoops’

That strategy didn’t work because Clarke didn’t follow through, Kantar’s Roberts said.

“Shoppers still have to jump through too many hoops to get good value out of Tesco,” he said. “You need to fiddle with vouchers, your Clubcard, and fill up your car to get discounts. At Aldi, you just walk in. Aldi’s not just winning on price, it’s winning because it’s easy.”

Today’s dividend cut means the board is probably giving Lewis scope to allow the retailer’s margins in the U.K. to narrow as he tries to turn around the business, said John Kershaw, an analyst at Exane BNP Paribas.

Tesco’s trading margin was 5 percent last year and traditionally has been the highest in the U.K. industry and a multiple of those of continental European supermarket chains. The gauge may tumble to 3 percent for the full year this year, Shore Capital analyst Darren Shirley estimates.

That will also bring it more in line with European grocers which on average operate on a margin of 2 percent to 3 percent, according to market researcher Euromonitor.

Tesco may also be signaling a review of the company’s international operations, Exane’s Kershaw said.

Clarke, who took over from Terry Leahy, exited businesses including the U.S. and Japan while CEO and folded the company’s Chinese operations into a joint venture. Tesco still sells groceries in markets including South Korea, Turkey and Poland.

“The current strategy -- trying to be slightly better at everything without being great -- isn’t working,” said Bernstein’s Monteyne. Despite the measures taken, “it is too early to call the bottom.”

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net Thomas Mulier, Celeste Perri, Tom Lavell

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