Tesco is parachuting in new boss Dave Lewis a month ahead of schedule to lead a radical shakeup of the business after the supermarket issued its third profit warning in eight months and slashed its dividend by 75%.
Lewis, who starts on Monday, will be “reviewing every aspect of the group’s operations” to tackle a sales slump at the UK’s biggest retailer, which is losing out to vigorous competition from discounters such as Aldi and Lidl as well as upmarket rivals Waitrose and Marks & Spencer.
More than £1.3bn was wiped off Tesco’s value as its shares dived nearly 7% to 230p, their lowest level in 11 years. Investors fear Lewis will escalate the supermarket price war, which has already seen Tesco invest more than £200m in price cuts. Those concerns also pushed down the share price of both Sainsbury’s and Morrisons by about 5%.
Sir Richard Broadbent, Tesco’s chairman, said Lewis’s review would consider “all options that create value for customers and shareholders”. He said: “The board’s priority is to improve the performance of the group. We have taken prudent and decisive action solely to that end.”
Last month, when Tesco ousted Phil Clarke as chief executive, Broadbent insisted his departure was not linked to any deterioration in financial performance and insisted the outgoing boss had “started the job of realigning the business”.
Tesco said on Friday that it now expected to a make a trading profit of between £2.4bn and £2.5bn in the year to April, down from an expected £2.8bn. Last year the retailer turned in £3.3bn.
The company is also cutting planned investment – mainly linked to IT spending and Clarke’s store refurbishment plan – by £400m, which is £600m lower than last year. The half-year dividend payout is being slashed by 75% to 1.116p a share, which will save £900m if repeated at the end of the year.
Together those moves will give Lewis, who left the consumer goods conglomerate Unilever on Friday, a fighting fund of up to £1.3bn, which analysts expect him to spend on a combination of price cuts and improvements to service in stores.
Bruno Monteyne, an analyst at Bernstein Research said: “By doing this work now, it creates a sense of urgency internally and externally. Lewis is admitting there are big problems and big problems need big solutions.
“Tesco has failed to adapt to the changes in the UK competitive landscape, such as more local competition and better execution by the discounters. By raising prices in the UK faster than anybody else, Tesco also lost its historical differentiation of being a value retailer, giving a free ride to the targeted retailers at both ends of the [price] spectrum.”
Tesco is now the worst performer among the UK’s biggest supermarkets. Its market share is down more than a percentage point on a year ago as it has slowed spending on promotions while failing to see much benefit from its efforts to improve the look of stores. Some analysts believe the retailer is losing more than a million customer visits a week as cash-strapped shoppers hunt around for a way to save money.
In a tough grocery market, which is growing at the slowest pace in almost a decade, Morrisons and Sainsbury’s are also losing ground. But Aldi and Lidl saw sales rise by 29.5% and 18.3% respectively as shoppers react positively to their mix of low prices and convenience.
Tesco’s profits warning is seen as a clearing of the decks before Lewis’s arrival. A previous profit warning, in July, led to the ousting of Clarke, who failed to stem the slide in sales and profits during his three-year tenure.
Clarke invested £1bn in improving the look of stores and improving service, but allowed Tesco to become gradually more expensive than its biggest rival Asda and well ahead of the discounters.
Darren Shirley, retail analyst at Shore Capital, said: “We have now lost count of the number of times that we have downgraded our forecasts for Tesco over the last three years.”
Broadbent said: “The business continues to face a number of uncertainties, including market conditions and the pace at which benefits from the investments we are making flow through.”
Market observers welcomed the early arrival of Lewis ahead of the important Christmas trading season, but many expect Tesco’s profits will take further hits, most likely in the spring, as Lewis works through his longer-term strategy for the business.
“Is this the trough? We cannot assume so,” wrote James Grzinic, an analyst at Jefferies in a note.
Analysts said further adjustments to profits could come as it was not clear how much Tesco’s new boss will invest in price cuts, increasing the number of staff in stores or whether he will have to make redundancies at head office.
While the priority will be turning around the UK business, which delivers the majority of profits, Tesco is also struggling in a number of overseas markets. Shirley suggested Tesco could float its Asian business in Hong Kong.
Meanwhile, Tesco has investments in a number of small UK businesses such as the Dobbies garden centre group, the Blinkbox digital streaming service and the Giraffe restaurant chain that could also be sold off.
Other analysts suggested Tesco needs to get rid of its Clubcard loyalty scheme or Fuelsave promotion in order to focus on cutting prices on everyday groceries.