Tesco CEO Needs Time as Investors Grow Impatient, Herro Says

Tesco Plc Chief Executive Officer Philip Clarke needs another 18 months to turn around the U.K. grocery leader, one of its biggest shareholders said, days after the CEO reported the worst sales growth in 40 years and others called for a change to leadership.

“The reason I’m not screaming for his head is because he seems to be doing the things that are necessary to solve the past issues,” said David Herro, chief investment officer at Chicago-based Harris Associates LP, which owns a 3.5 percent stake in the company. “This is fixable, it just takes time.”

Some investors are growing impatient at Clarke’s inability to turn Tesco around. The business needs a management team that will take bolder action, Robert Talbut of Royal London Asset Management said yesterday in an interview with Sky News.

Clarke this week said he’s not ready to pledge an improvement in sales growth after the company reported the steepest decline in U.K. sales in at least four decades. The CEO stuck to his mantra that refreshing large stores, cutting prices of essential items and retraining staff will be enough to stop the defection of customers to discounters Aldi and Lidl.

Tesco’s sales fell 3.3 percent in the 12 weeks ended May 24, while its market share dropped to 28.2 percent from 29.5 percent a year earlier, researcher Nielsen Holdings NV said today. By contrast, Aldi and Lidl’s sales during that period soared 33 percent and 23 percent, respectively, Nielsen said.

Sliding Shares

Escalating a price war, as has been suggested by analysts including Shore Capital’s Clive Black and HSBC’s Dave McCarthy, wouldn’t work, according to Herro.

“That would be utterly pointless,” he said. “Whoever says they can win a price war is off their rocker,” adding that the German discounters have more capacity to reduce prices because they are privately held and less susceptible to shareholder pressure.

His comments were echoed by Richard Marwood, who helps oversee $700 billion in assets at Axa Investment Managers in London, including more than 0.5 percent of Tesco.

“I remain skeptical that launching a price war is going to benefit shareholders,” Marwood said, adding that he doesn’t “necessarily agree” with calls for Clarke to be replaced.

Tesco shares have fallen in each of the last four years and are down a further 13 percent in 2014 as the grocer continues to lose market share both to discounters and upscale competitors such as Waitrose. They were little changed at 291.8 pence at 1:12 p.m., compared with a 2007 closing peak of 492 pence.

Online Leadership

Investors will be able to get a better handle on whether Clarke’s plans have succeeded once the Cheshunt, England-based retailer completes refurbishment of the large supermarkets which are “like anchors around their neck,” Herro said.

Harris Associates started buying Tesco shares after the grocer said in January 2012 that the failure of its “Big Price Drop” campaign was weighing on sales and profit.

“I kick myself now because things were a lot worse than we thought,” Herro said. He continued buying over the past year, he said, attracted by the strength of Tesco’s balance sheet, a large freehold store base, its leadership in online grocery and a commitment to boost multichannel services.

Herro said he’ll give Clarke enough time for his recovery plans to take hold.

“Within the next 18 months we should know,” he said.

Before it's here, it's on the Bloomberg Terminal.