The only good thing about having six or seven successive quarters of declining sales is that people get used to bad news. So much so, in fact, that sometimes bad news can actually be welcomed. Tesco’s shares rose 3.9% this morning to 225.9p after it surprised investors with a sales fall of a mere 1%.
The results, which are for the 13 weeks to May 30, reflect boss Dave Lewis’ aggressive plans to pull back the over-extended retail empire and entrench against the sustained assault from low-price German stores Aldi and Lidl.
‘We are fixing the fundamentals of shopping to win back customers,’ Lewis said. ‘Whilst the market is still challenging and volatility is likely to remain a feature of short-term performance, these first quarter results represent another step in the right direction.’
Lewis’ in-store strategy involves cutting choice (product lines are down by 20%), increasing availability and moving away from discounting by cutting headline prices. At the same time, he’s brought new store openings virtually to a halt and is selling existing ones, while putting Tesco’s South Korean business up for sale to shore up its crumbling balance sheet.
The point clearly has been to restore the firm to profitability and appease investors. That might sound eminently sensible, but it’s a strategy that’s divided opinion. Essentially, the split is along finance vs marketing department lines.
FDs might agree with John Ibbotson of retail consultants Retail Vision: ‘Lewis has grasped the nettle and is doing what needs to be done by streamlining the business, focusing on the core UK market and facing up to the pension deficit and property write-down.’
CMOs, on the other hand, might well say that an excessive focus on the accounts means Lewis is missing the big picture. After all, customers don’t really know what Tesco stands for any more. Is it price? No, that’s Aldi. Is it quality? No, that’s Waitrose. If it’s neither of those, can it survive just by being the nearest shop to where you live?
‘The big hole in Tesco’s bucket is trust, the trust of its suppliers and the trust of its customers,’ says Phil Dorrell of retail consultants Retail Remedy. ‘To plug the hole in Tesco’s bucket, [what] it must invest in, is marketing. The discounters have done so in innovative and imaginative ways, things that Tesco has sadly lacked thus far.’
Of course, Tesco has problems in both its financials and its brand, and they feed off other. Both need addressing, but the choice is whether to pluck the chicken first, or crack the egg. Only time will tell whether Lewis’ approach will work.
It’s hardly surprising, however, that investors approve of a leader who wants to cut costs and restore profits, rather than spend money Tesco doesn’t have investing in its image. Restoring Tesco’s tainted brand may be essential to its future success, but fixing its finances is essential to its immediate survival. Ultimately that has to come first.