Is a Tesco turnaround on the cards

As Tesco CEO Phil Clarke steps down and is replaced by former Unilever executive Dave Lewis the supermarket sector is more cut-throat than ever, and it is far from clear whether a change at the top will revive the companys fortunes.

Is a Tesco turnaround on the cards

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Tesco has a market cap of around £23bn and makes up a big chunk of not only many UK equity portfolios but also some global equity funds. The top ten shareholders in Tesco include Norges Bank Investment Management, Legal & General Investment Management, BlackRock, Harris Associates and Berkshire Hathaway.

Would these investors be best advised to hold tight and give the new CEO a chance to deliver, or is it time for Tesco holders to whittle down positions in the supermarket chain and some of its peers?

Another way of asking the question is to say: has Tesco’s decline over recent years been due to the CEO and others at the top having a flawed strategy and taking poor decisions, or is it in fact due to fundamental shifts in the industry which Clarke and his colleagues had little, if any, control over.

Tesco’s share price initially responded positively to the news that the boss who has overseen the ‘worst sales in four decades’ had gone, closing up 1.28% at 288p. However one day does not mean much in the bigger picture.

Fund manager and industry analyst views are inevitably somewhat mixed on Tesco’s prospects but you would struggle to find any that see a change of CEO as a silver bullet for Tesco or any other UK supermarket group. There are fundamental issues in the sector which show no signs of going away, the principle ones being the entrance of aggressive discount retailers such as Aldi and Lidl, and the big move to online grocery shopping that has been rapid and is ongoing.

“We remain concerned about the outlook for the food retailing sector given the disruptive effects of the internet, discount retailers and a large fixed asset base,” said Jamie Forbes-Wilson, manager of the AXA Framlington Blue Chip Equity Income fund. “These factors are likely to be a significant drag on margins and profitability going forward,” he added.

“There had to be change at Tesco with another big profit warning coming though,” said George Godber, manager of the CF Miton UK Value Opportunities fund.”Godber said there have been some strategic mistakes made in his view, such as acquiring businesses that do not add value like café chains, and therefore if Lewis can make better calls then there is some scope to turnaround the company’s performance.  

According to Godber the way back to the good times for Tesco could be getting much more aggressive on price. He noted that Tesco was generally regarded as the cheapest of the supermarkets a few years ago however gradually moved away from that position and is now up nearer the more expensive end. He added that Tesco has got itself stuck in the middle of the high quality versus low price question and is now neither seen as one or the other in consumers’ minds, so rectifying this could be a way the new man can improve its prospects.

All in all Godber sees Tesco shares staying as a sell for now in his view, but in the mid-term with the right strategic changes implemented, it could be a good buying opportunity.

Chris White, head of UK equities at Premier Asset Management is sceptical on the impact of the change of CEO and the wisdom of ratcheting up the price war. “Whilst Dave Lewis seems to be well thought of, quite what he will be able to do about the march of discounters such as Aldi and Lidl is a moot point,” he said. "There is a body of opinion in the City suggesting that Tesco should start a price war to squeeze its competitors, however it is not obvious that directly taking on the discounters in a race to the bottom on price is the best way to serve its customer base and protect its market position," he added.

Brewin Dolphin meanwhile had a more bullish take on the news. It said it had been expecting a change of management and hiring Lewis could be the ‘catalyst for a change of strategy’ which leads to a performance turnaround. It therefore believes Tesco’s dividend will be maintained despite the current difficulties and it continues to rate Tesco shares as a buy.

One thing is for sure, Dave Lewis will be having some interesting meetings with Tesco’s major shareholders over the coming weeks and months.

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