Tesco calls time on new Extra branches after profit warning shock

When Sir Terry Leahy passed the Tesco leadership baton to Philip Clarke last year, the succession planning was described as "perfection" and investors sat back for another decade of financial success. Instead, Britain's biggest retailer is reeling after its first profit warning in 20 years. About £5bn was wiped off the company's stock market value after the retailer confessed that its UK chain, which generates more than 60% of group profits, had been wrung dry to fund the creation of Tesco's global empire.

The chain's Christmas sales were the worst in decades and Clarke said Tesco needed to sort out basics like fresh food, product ranges, customer service and staffing levels, to win back shoppers who had defected to Sainsbury's and Waitrose, and even no-frills chains Aldi and Lidl, for their turkeys and sprouts.

Things were so bad Clarke quoted Nietzsche's "what doesn't kill us makes us stronger" as he briefed reporters. It was not about the Big Price Drop, the £500m price-cutting campaign that had failed to cut through a "noisy" market. No: the retailer had to tackle "long-standing business issues".

The 16% fall in Tesco's shares was bigger than that recorded on Black Monday; Evolution Securities analyst Dave McCarthy has dubbed it "Tesco Thursday". He says: "We suspect that when investors look back, they will view this day as the day the market recognised the fundamental changes that are taking and have taken place. A profit warning is the last sign of a company in trouble — and they usually come in threes. Tesco admitted for the first time that it has long-standing problems around range, quality and service. It has slashed wage bills to try to preserve profits and that, like pushing prices up, is a short-term fix at the expense of future profits."

Over the past five years Tesco has increased the productivity of its UK store staff to record levels. The average number of full-time employees in a 40,000 sq ft superstore has fallen from 275 to 226. Kantar Retail analyst Bryan Roberts says the slide in store standards was evident in everything from the queues at the checkouts to customers carrying their groceries home in plastic cones designed for fresh flowers because the carrier bags had run out. "They probably cut too much from store budgets and service has declined."

Of course, Tesco is not going bust. The supermarket made profits of £3.7bn on nearly £68bn of sales last year. The City was shaken only by the absence of profit growth forecasts when it had already punched 10% into its computers. But there was also another bombshell. Clarke was not sure Tesco needed any more of the sprawling out-of-town Extra stores it has spent so long battling planners to build – and that were vital in its conquest of Britain's retail sector in the 1990s. He didn't want to go as far as to label its more than 200 out-of-town hypermarkets as "white elephants" but said they were now a "less potent force" as electricals and clothing sales shifted online.

He has a point, but as all its rivals have followed it out of town, it was a shock for the sector to hear. As Alan Parker, the City grandee trying to rescue Mothercare, put it succinctly last week: "The whole retail market is restructuring at the moment, away from bricks and into clicks."

Tesco has also been hurt by stronger competition. After periods in the wilderness, both Sainsbury's and Morrisons are once again forces to be reckoned with, and even its smallest rivals – Waitrose and the discounters Aldi and Lidl – are setting the pace on growth.

When Clarke, who first worked for Tesco in 1974 as a part-time shelf stacker while he was still at school in Liverpool, was appointed to succeed Leahy, their similar backgrounds and immersion in the business suggested they were cast from the same mould. Only time will tell if Clarke can have as much success.

Source : Zoe Wood –The Guardian
www.guardian.co.uk/business/2012/jan/15/tesco-growth-megastores?INTCMP=SRCH