Handling of succession at Tesco a textbook case

LONDON BRIEFING:Choosing an insider as new chief executive is a testament to the depth of Tesco's management

FOR ONE analyst, it was akin to hearing Sir Alex Ferguson had stepped down as manager of Manchester United.

That might be stretching it a bit, but news yesterday that Sir Terry Leahy is to take early retirement from Tesco certainly took the City by surprise.

The man who built the supermarket group into Britain’s biggest retailer by far, and the fourth-largest in the world, will step down next March at the age of 55 after having served 14 years as chief executive.

Widely regarded as one of Britain’s most able and most-admired business leaders, Leahy is also one of the longest-serving chief executives in the FTSE 100.

That factor is something of a Tesco tradition – since founder Jack Cohen started selling groceries from a stall in London’s East End in 1919, the group has had only five chief executives.

Phil Clarke is to be the sixth and, like Leahy and much of senior management at the group, is a Tesco “lifer”. He started stacking shelves at Tesco in 1974, when he was a 14-year-old schoolboy, joining the company full-time after university and rising through the ranks to head its expanding international operations.

The orderly handling of the succession at Tesco is a textbook case of how these things should be done, and serves as a stark contrast to the shambolic and very public process to secure a replacement for Sir Stuart Rose at Marks & Spencer.

The ability to choose an insider – and Clarke was one of several very strong internal candidates – is a testament to the enviable depth of Tesco’s management.

Clarke is very much in the Leahy mould, which gave some reassurance to Tesco’s City followers that there will be no sudden strategy shifts when he takes over in nine months’ time. But the timing of the announcement did create some unease, reflected in a 3 per cent fall in the group’s share price at one stage yesterday.

There have been regular bouts of speculation on the subject of who might succeed Leahy, but nothing too frantic, as he had been widely expected to stay in place for another couple of years. Which raises the question: why now?

Leahy may feel that “my work is almost complete”, as he said yesterday, but that doesn’t entirely ring true. The most pressing unresolved issue at the group is its struggling US operation, Fresh Easy, which is still heavily loss-making and shows no immediate signs of breaking even, let alone returning an acceptable profit.

In the three years since it moved into the US, Tesco has racked up losses of some £400 million (€482 million) there, a significant sum even for a company making over £3 billion a year.

Does the fact that Leahy will be leaving before Fresh Easy posts a profit mean he has given up on the business, or that he is still convinced it will come right in the end and can do so without his help? Or could it be that a new boss will find it easier to pull the plug on a rare Tesco blunder?

It was Fresh & Easy that probably scuppered the chances of Tim Mason becoming Tesco’s sixth chief executive. Once regarded as the leading internal candidate, Mason was given the task of setting up and running the US business.

Its failure to perform must have damaged his chances of taking the top job, although, perhaps by way of consolation, he has now been awarded the new role of deputy chief executive.

That may ensure he stays with Tesco rather than seeking a CEO seat elsewhere, but the danger is that he may be distracted from sorting the problems in the US. Clarke will also want to hold on to Leahy’s other lieutenants, including Andy Higginson, who heads Tesco’s banking and internet operations, and commercial director Richard Brasher, both of whom were regarded as potential successors to Leahy.

Brasher is being given the newly created role of head of operations in the UK and Ireland, while Asia will be run by David Potts. If the reshuffle works, it will be a neat way of retaining the top talent, but there is a possibility that too much change could destabilise the Tesco profit machine.

Next March will be “a good time” for a change at the top, Leahy said, although life will undoubtedly become increasingly tough for the retail sector in the years of austerity ahead. For that reason alone, as much as for his stellar track record, Leahy will be a very hard act to follow.

Fiona Walsh writes for the Guardiannewspaper in London