Back to basics for Tesco: Dave Lewis’s plan has a fighting chance of success

 
Paul Thomas
Lewis’s strategy will be judged by its success in making Tesco stores appealing to shop in again (Source: Getty)
If Tesco chief executive Dave Lewis takes any pleasure in yesterday’s apocalyptic-sounding headlines, it will be the knowledge that the “kitchen sinking” is complete – surely there can be no more bad news for the retailer to announce.

Such a huge loss – £6.4bn in the year to the end of February, and one of the biggest in British corporate history – might seem like a black hole that threatens to consume the brand. It has certainly obscured the fact that Tesco’s trading profit was £1.4bn in the same year, nearly double the expected figure.

Yet the fallen titan’s long night may prove to be darkest just before dawn. The combative Lewis has a simple – but seemingly effective – plan to stop the rot. Having cleared the decks and dealt with the slew of problems he uncovered, he has set himself three goals: to improve the competitiveness of Tesco’s UK operation, to repair its balance sheet, and to rebuild trust in the brand.

Making its UK stores more competitive will involve continuing to take the fight to its rivals on price – and radically improving its own customer experience.

The relentless rise of the discounters will force Tesco to offer permanently lower prices as well as more relevant promotional offers. It has already begun to improve customer service by putting more staff on the shop floor, and is fighting to regain its hard-won reputation for short checkout queues.

As for the balance sheet, it’s hard to see what else there can be to write down. The cuts have been ruthless – Lewis is closing 43 under-performing stores, cancelling new store openings, and restricting capital expenditure in the immediate future.

The brand has retrenched, and jettisoned many of the peripheral businesses that were dragging it down. All of this will slowly improve the balance sheet.

Perhaps the hardest task will be the rebuilding of trust in the brand. The perceived lack of transparency has been as damaging for its share price as the write-downs. While the share price fell in the aftermath of yesterday’s results, some City analysts are already rating Tesco stock as a “buy”.

Lewis’s open letter to his staff about the woeful results shows not just his commitment to transparency, but also the value he places in his employees – many of whom are feeling understandably jaded.

By focusing on its physical stores – the bedrock of the business’s success – he aims to turn Tesco into a top class grocer once again. Its misguided adventure as a global conglomerate nearly proved fatal, and the empire grew dangerously overstretched. Now the complacency, hubris and corporate jets are gone. The back to basics approach has a fighting chance of success, even if the constant price war will hamper profit growth.

Ultimately, Lewis’s strategy will be judged by its success in making Tesco stores appealing to shop in again. If the brand can repair its reputation for good service, great choice and strong offers, it will at least be heading in the right direction.

But to say Tesco’s chief executive has a mountain to climb to reverse its decline is to underplay the scale of the task. Right now, Lewis must feel like an ant scaling the Himalayas.

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