By Peter Stiff
LONDON--The pressure is piling up for Tesco PLC Chief Executive
Philip Clarke, as his efforts to turn around one of the world's
largest retailers falter.
The British supermarket chain's market share and stock price are
languishing at near-decade lows. Analysts expect the company to
report its second consecutive fall in full-year profit on
Wednesday, as it battles fierce competition in its home market and
retrenches overseas.
Tesco's tough times reflect a wider shift in the U.K. grocery
sector, brought on by the rise of international discount chains
Aldi Stores Ltd. and Lidl UK GmbH. They are forcing Tesco and the
country's other big supermarket chains to reduce prices in a fight
to retain customers.
Tesco, which competes with Carrefour SA of France for the title
of the world's No. 2 retailer by revenue after Wal-Mart Stores
Inc., is also contending with a trend of British consumers shopping
increasingly online and in smaller convenience stores. They are
eschewing the large out-of-town supermarkets where Tesco built its
dominant position.
Those pressures are also affecting Wal-Mart, which owns the Asda
Stores Ltd. chain in the U.K., the group's largest international
market. But competition and changing trends have hit Tesco the
hardest.
The chain's U.K. market share fell to 28.6% in the 12 weeks to
March 31, from 29.7% in the same period last year, according to
data released last week by Kantar Worldpanel. Cash-register
receipts fell 3% in the period.
Analysts' consensus estimates forecast the company to report a
trading profit of GBP3.24 billion ($5.41 billion) for the year to
Feb. 14, down 6.1% on last year's GBP3.45 billion. Last year's
profit fall was the first in 19 years. Revenue is expected to fall
2% to GBP64.1 billion.
Such a disappointing performance would be a further blow to Mr.
Clarke, who joined Tesco as a teenager in 1974 and worked his way
up the ranks, succeeding former longtime Chief Executive Terry
Leahy in 2011. Mr. Leahy transformed the company from a modest
British supermarket chain to one of the world's largest
retailers.
Mr. Clarke had previously been responsible for Tesco's
international operations, and analysts expected him to continue
aggressively expanding overseas. Instead, he has pulled back from
some international forays-- such as the U.S. and Japan--after
disappointments there, and in an effort to protect Tesco's
floundering U.K. position.
Mr. Clarke's U.K. moves have included store revamps, recruitment
drives and attempts to entice customers with upmarket coffee shops,
bakeries and family-friendly restaurants. But those moves haven't
reversed falling sales. Amid the turnaround effort, Chief Financial
Officer Laurie McIlwee, a 14-year veteran of the company, recently
said he would resign.
"Keeping Tesco on the straight and narrow was always going to be
a tough task given the challenges of scale, competition and
economics," said Clive Black, an analyst at brokerage Shore
Capital, who has covered Tesco for 20 years. "However, it is hard
not to argue that management has compounded matters in its core
market whilst much needs to be done to demonstrate both control and
a future in Europe."
A Tesco spokesperson wasn't immediately able to comment on
Monday.
The Kantar survey showed Aldi and Lidl continuing to lure
shoppers away from larger rivals. They now hold a combined 8%
market share, compared with 6.3% this time last year. Industry
analysts say the German challengers, which initially attracted
shoppers with low prices, are now also appealing in terms of
quality.
Some of Tesco's domestic competitors have moved fast to compete.
Wm. Morrison Supermarkets PLC, the country's No. 4 retailer by
sales, earlier this year said it would drop prices to take on
discount chains, which the company expects to cost GBP1 billion
over three years. Some analysts have suggested Mr. Clarke should
adopt a similar policy at Tesco, although this would hurt profit
margins. So far, Tesco has pledged to spend just GBP200 million on
reducing prices.
Wal-Mart, too, has found itself in the unusual position of
having to respond to the discounters. Asda, Britain's No. 2
retailer behind Tesco, is spending GBP750 million this year on
opening new stores and refitting old ones. Most of the money will
be spent in the south of England, where Asda hasn't had much
presence. Asda has pledged to invest hundreds of millions of pounds
on reducing prices further.
Ed Garner, a director at Kantar, said the Wal-Mart unit was
taking the battle to the discounters, but could also be taking
advantage of a window of opportunity amid disarray at Tesco. An
Asda spokesperson was immediately able to provide comment on
Monday.
Write to Peter Stiff at peter.stiff@wsj.com
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