Tesco presents Lewis with long shopping list of problems

Retailer’s incoming chief faces the stark possibility of cutting dividends

Tesco shares fell to a 10-year low last week as ratings agency S&P cut its credit rating from BBB+ to BBB.

Tesco shares fell to a 10-year low last week as ratings agency S&P cut its credit rating from BBB+ to BBB.

Thu, Aug 14, 2014, 14:52

Dave Lewis, the Unilever executive being brought in to turn around the troubled Tesco group, does not start his new job until October 1st. But there’s little doubt the chief executive designate is spending his summer months grappling with the lengthy list of problems that awaits him at Britain’s biggest supermarket chain.

Apart from the most obvious one – how to stem the sales decline in Tesco’s core UK operation – Lewis’s most pressing dilemma will be on the dividend payment. As the sales decline shows no signs of slowing, analysts are increasingly convinced that the new boss will make his mark early on by slashing the payout to shareholders.

Profit warning Cutting the dividend would send a stark message to the market – but no starker than the recent profit warning that accompanied Tesco’s unceremonious sacking of chief executive Phil Clarke just hours before a swish party to celebrate his 40th anniversary at the group.

The party was cancelled, although Clarke is staying on to run things until Lewis arrives in the autumn.

One mistake Lewis will be determined not to make is to wait too long before taking decisive action. Clarke fell into this trap, waiting two years before finally pulling the plug on the group’s disastrous US venture Fresh & Easy.

For Clarke the decision to unravel his predecessor’s American dream would have been a difficult one, having worked as part of Terry Leahy’s management for so many years.

However, as the first outsider to run Tesco since Jack Cohen founded the business from an east London market stall in 1919, Lewis will have no such sentimental attachments.

Since his appointment was announced last month there has been more bad news for Lewis to ponder over the summer. Last week, Tesco shares fell to a new 10-year low as the ratings agency S&P cut its credit rating from BBB+ to BBB – two notches above investment grade – and slapped a “negative outlook” on the group.

S&P said Tesco’s profitability would continue to weaken because market competition in the UK would remain persistently high – and even intensify – over the next 12 months. In S&P’s view, Tesco’s efforts to improve its operating performance in its home market and internationally “have not been successful at combating the structural and enduring changes to the competitive landscape and consumer behaviour”.

S&P said it might be moved to restore Tesco’s outlook to “stable” if the new management team were to execute “credit-enhancing policy measures” such as disposals, reduced capital spending or “moderating shareholder remuneration” – in other words, cutting the dividend.

In the last financial year Tesco investors received dividends of 14.76p a share. One analyst, Nicla Di Palma of Brewin Dolphin, believes Lewis could cut the dividend to 10p a share, a move that would horrify shareholders but which would save the company £400 million – money that could be put towards the fight against the discounters that are snatching Tesco’s market share.

Price cuts As Di Palma points out, Lewis has no direct retail experience, having spent his entire career in consumer goods at Unilever, so it’s difficult to know what strategy he is likely to adopt at Tesco.

But she believes the most likely option is that he will oversee significant price cuts at the group as it battles to restore sales growth in its core domestic market.

A sustained round of heavy price-cutting would further damage Tesco’s profitability – but, if Lewis has the stomach to see it through, Tesco’s competitors will feel the pain even more.

Despite its sliding market share, Tesco is still by far the UK’s largest supermarket group, with a share of 28.9 per cent.

The number two, Asda, is well behind with 17 per cent.

The gap is nowhere near as large in the Republic, however, where the most recent Kantar figures showed SuperValu breathing down Tesco’s neck with a share of 24.7 per cent in the last quarter, against Tesco’s 25.6 per cent.

Tricky dilemma Meanwhile, as Lewis plots his Tesco strategy over the next six weeks, there’s another tricky dilemma to tackle.

October 1st, the day he takes up his new job, just happens to be the day Tesco is due to report its interim results. But who will present the figures to the City? Will it be the hapless Phil Clarke, who has stayed on only until his replacement could start? Or will it be new boy Lewis, who will only officially have had his feet under the table for a few hours?

Perhaps it doesn’t really matter: whoever presents the results, we already know they will make grim reading.

Fiona Walsh is business editor of theguardian.com

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