Shares in Britain’s biggest grocer Tesco (TSCO), which are up 25% this year, fell 2% to 235p at the open after the surprise news that chief executive Dave Lewis would step down next summer.
Lewis will be succeeded by Ken Murphy, current chief commercial officer and president of global brands at Walgreens Boots Alliance which owns the UK high-street pharmacy chain Boots.
News of Lewis’s departure initially over-shadowed half year results which saw a strong rise in operating profits, up 25.4% to £1.4bn, thanks to better-than-expected cost savings. Shares later recovered to trade up 0.5% at 240p.
CHANGE AT THE TOP
Having joined Tesco in 2014, Lewis has overseen a transformation in the grocer’s fortunes, cutting prices, cutting jobs and master-minding the £3.7bn takeover of wholesaler Booker in 2017.
The outgoing chief executive described his decision to quit next year as a personal one.
‘Our turnaround is complete, we have delivered all the metrics we set for ourselves. The leadership team is very strong, our strategy is clear and it is delivering. With these firm foundations and a competitive, sustainable growth strategy in place, I have no doubt that Tesco will kick on again under new leadership next year.’
His successor is something of an unknown for UK investors but Tesco chairman John Allen is firmly behind his appointment.
‘Ken is unquestionably, a seasoned, growth-orientated business leader. He has values which align with our own, strong strategic and operating acumen, and is proven at the very top of a large and respected multinational retail group. I firmly believe we have the right person for the job.’
GROWTH CHALLENGE
While Tesco is undoubtedly in a better place than it was when Lewis took over five years ago, growth in the UK grocery market is still proving elusive. In the six months to 24 August, Tesco's UK and Irish sales were up 0.2% to £22.4bn and up just 0.1% on a like-for-like basis.
Digging deeper, UK sales were actually down 0.9% on an absolute basis and down 0.3% on a like-for-like basis in the first half, with almost all of the headline growth coming from Booker where sales were up 6.5% on an absolute basis and 2.4% like-for-like.
Price cuts, a revamped own-label offering and special offers seemingly aren’t enough to stem the loss of customers who have grown increasingly used to shopping at discounters Aldi and Lidl.
At the same time, the jury is out on the potential of Tesco’s own discount chain, Jack’s, to really move the needle in terms of sales given with the size of the core store estate.
News last month that the flagship 40,000 sq ft Jack’s store in Lancashire is to draw down the shutters and re-open as a Tesco would seem to suggest that the concept has a limited shelf-life.
INCREASING COMPETITION
According to market research firm Kantar Worldpanel, Tesco’s share of UK grocery sales fell to 26.9% in the 12 weeks to 8 September compared with 27.4% in the same period a year.
Meanwhile Aldi and Lidl’s combined share has grown from 13.1% a year ago to 14.1% driven by store expansion and an increase in customers’ average spend.
Aldi, which operates 840 stores in the UK, recently announced plans to pump another £1bn into expanding its network to 1,200 stores by 2025. Being privately-owned means that it doesn’t have to answer to outside shareholders and can focus on growth at the expense of profits.
While Tesco’s turnaround may be complete, it looks as though Tesco’s new chief executive will have to ‘roll up his sleeves’ as Dave Lewis was wont to in order to steer the company back to growth.
