Tesco’s Clarke Faces ‘Big Struggle’ in U.K. as Rivals Close In

Tesco's Incoming CEO Philip Clarke
Philip Clarke, seen here as international director of Tesco Plc. Photographer: Mikel Laburu/Bloomberg

Philip Clarke spent the last seven years helping Tesco Plc expand across the globe. When he succeeds Terry Leahy as chief executive officer next week, his first task is to take back Britain.

The 50-year-old, who started working for the U.K.’s biggest retailer as a stock boy at 14, must combat competitors’ faster expansion and increased price cuts at a time of shrinking consumer confidence. He also has to allay investor concern over the departure of two senior executives this year.

While Tesco’s dominant U.K. position helped fund Clarke’s expansion of the company into markets including China and Turkey, its share of Britain’s 151-billion pound ($245 billion) grocery market has hovered around 30 percent since 2006. It had more than doubled in the first nine years of Leahy’s 14-year reign as CEO. Tesco’s sales of non-food goods in the country fell 1.5 percent on a same-store basis in the Christmas period.

“The U.K. business is the big struggle,” said William Hobbs, who helps manage 164 billion pounds in assets, including Tesco shares, at Barclays Wealth in London. “We’d really like them to use the U.K. as an ongoing cash cow, to increase returns and not lose any more ground there.”

Clarke needs to convince investors that the U.K. offers growth potential outside of the grocery market, according to James Anstead, an analyst at Barclays Capital. The retailer is extending its brand with plans for bank accounts and mortgages under Tesco Bank, second-hand car dealerships and in-store beauty parlors. Its clothing and non-food lines also need to be widened and more premium lines added, Anstead said.

Asda Price Pledge

“Clarke needs a nuts-and-bolt review to improve the products right down the line,” said Tim Green, an analyst at Brewin Dolphin in London, where he helps manage more than 23 billion pounds, including Tesco shares. “It’s the core that needs to be revisited, not just the types of products, but the service on offer.”

The son of a Tesco store manager, Clarke also has to contend with a step-up in strength by competitors. Wal-Mart Stores Inc.’s U.K. Asda chain, under new CEO Andy Clarke, last month started a campaign promising to be 10 percent cheaper than rivals or it will refund the difference. J Sainsbury Plc, the second-largest U.K. supermarket, and upscale grocery chain Waitrose Ltd. have increased their market share by adding space, non-food products and extending their own-brand ranges.

‘Toughest Job’

Clarke’s “toughest job will be to convince investors that there is still a good story in the U.K.,” Anstead wrote in a report. “We expect that he will communicate a message of relative calm -- while also reminding investors of the potential for growth beyond core grocery.” Anstead has an “overweight” recommendation on Tesco stock.

Revenue at U.K. stores open at least a year rose 0.6 percent, including value-added taxes and excluding gasoline, in the six weeks ended Jan. 8, compared with Sainsbury’s 3.6 percent growth. The shares have fallen 4.9 percent over the past 12 months, while Sainsbury has gained 12 percent.

Clarke’s task hasn’t been helped by this month’s departure of Laura Wade-Gery, who left to join Marks & Spencer Group Plc weeks after being promoted to his executive board as commercial director for clothing, electronics and general merchandise. That followed the exit of Lance Batchelor, the head of Tesco’s mobile and telecoms businesses, to head up Domino’s Pizza U.K.

Executive Departures

“Some will be concerned that this represents the tip of the iceberg, with further fallout to come from the management reshuffle that followed Sir Terry Leahy’s retirement,” said Caroline Gulliver, an analyst at Execution Noble in London. Clarke’s enhanced executive board and the new CEO positions including Richard Brasher’s promotion to U.K. chief executive “will go some way to prevent this,” she said.

Clarke’s efforts to make Tesco less reliant on the U.K. haven’t been consistently successful. The U.S. Fresh & Easy chain remains unprofitable more than three years after its creation and the Japanese division, which it set up in 2003, is also losing money. Tesco operates in 13 markets outside the U.K. that account for about a third of its sales.

“He brings the experience of international, which is quite important because that’s where all the growth is,” said Chris Hogbin, a food analyst at Bernstein Research, with a “buy” rating on the stock. Sales outside the U.K. accounted for almost 31 percent of sales in fiscal 2010, up from 23 percent in 2007.

Soccer Rivalry

Under Leahy, who was knighted in 2002 after transforming an also-ran supermarket chain to the U.K.’s largest retailer, Tesco shares almost quadrupled. Leahy joined Tesco in 1979 and held marketing positions before becoming commercial director of fresh foods in 1986 and a member of the board in 1992.

Like Leahy, Clarke hails from Liverpool. He joined the graduate trainee program in 1981 after completing a degree in economics. The two men live on the same street. They diverge on their sporting affiliations: While Leahy is a fan of the Everton soccer team, Clarke follows city rival Liverpool.

The new CEO will make an “excellent leader,” said Charles Allen, a board member at Tesco from 1999 until 2010, and the former executive chairman of recorded music at EMI Group Ltd.

“His knowledge of every aspect of the business and his breadth of experience will enable him to hit the ground running,” Allen said via e-mail. “He will do a great job for all of Tesco’s stakeholders”

Brewin Dolphin’s Green has yet to be convinced.

Clarke has “got to get the U.K. right,” Green said. “The U.K. will be key to unlocking Tesco’s valuation as a whole.”

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