Tesco to shut 43 stores as Dave Lewis gets drastic

The revenue retreat slows at the embattled supermarket, as Dave Lewis catapults the kitchen sink at its financial black hole.

by Adam Gale
Last Updated: 26 Jan 2015

'Tesco' and 'good news' aren't words we're accustomed to seeing together but, after a 2014 it might like to forget, the supermarket has started the New Year with something positive. Well, almost.

In a trading statement/Christmas miracle announced this morning, Tesco has revealed its drastic sales decline has actually started to slow. Sales during the six weeks to January 3rd were only down 0.3% for the group. The third quarter to November 22nd still had a dismal 3.8% year on year decline, but given how bad things were sliding earlier in the year, the overall message is... good.

'I would like to thank all of my colleagues in Tesco,' said CEO Dave Lewis. 'The unique combination of retail expertise and real passion for the customer has been an inspiration to be a part of.'

Aw, isn't that nice? Except, Lewis, who got the nickname of 'Drastic Dave for his turnarouned of Unilever's UK business, has more for his 'colleagues' than kind words. Following last year's bottom line battering at the hands of super-efficient German discounters, an accounting scandal of monumental proportions and the collapse of Tesco's share price, all eyes were on Lewis to do something about it, and by the looks of it he hasn't disappointed.

Along with its results, Tesco also announced a cascade of measures designed to set the supermarket right. They came with some rather ominous words from Lewis. 'I am very conscious that the consequences of these changes are significant for all stakeholders in our business but we are facing the reality of the situation'.

Gulp. Here are the main prongs of Lewis' counterattack.

Too many stores? Not any more

Tesco is to shut 43 of its 'unprofitable' stores and is making a 'significant revision to our store building programme', which the BBC reports will mean 49 proposed new stores will be scrapped, shaving £1bn from the firm's capital expenditure next financial year.

One of the firm's big problems is that it built so many huge out of town stores just as customers were beginning to turn against them, and didn't notice. Stepping back from the least successful of these (and not building any more) will be costly, but is probably the most effective way to get the bottom line back to healthy levels. That said, the Daily Telegraph reports Lewis as saying many of the unprofitable stores are actually Tesco Express convenenience stores, a format supermarkets have piled into enthusiastically recently - so maybe big stores aren't the only problem.

Squeeze the shareholders

Relations with shareholders have been... strained since Tesco lost 45% of its value over 2014. But that hasn't stopped the supermarket deciding to cut its final dividend to the princely figure of 0p.

On the surface, that won't impress, but everyone knows Tesco needs to get control of its finances. Indeed, investors seem to accept that tornado season is time to button down the hatches. Shares opened more than 7% higher today and rose throughout the morning on the back of a strong showing by Lewis at his press conference, reaching 204.4p by lunchtime, 12.3% higher than yesterday.

Credit: Yahoo Finance

Efficiency, efficiency, efficiency

Just to make sure the shareholders don't feel victimised, the supermarket also said it's in consultations about closing the company's defined benefit pension schemes. To make this pill sweeter, though, it's putting more money into payroll, introducing a flexible benefits package.

Incentivising colleagues to work harder is only the tip of the efficiency iceberg. Tesco is closing its head office in Cheshunt in 2016 and making Welwyn Garden City its new HQ. It's also 'restructuring' its overheads and leading a 'simplification of store management structures'.

Exactly what that means is anyone's guess, but the firm says it should lead to £250m savings per annum, once it's taken place, at a one off cost of £300m. This should include reducing the executive team from 17 to 13, according to the Telegraph, which means the turnover of people at the top of the supermarket remains frighteningly high.

In that spirit, Tesco has appointed a new UK boss, Matt Davies. Davies comes over from Halfords, where apparently he will be missed. Shares in the car parts and bike company fell 6.9% to 490p on the news.

Cut back to the core

In recent years, Tesco has expanded well away from its original grocery core. Today, it announced what could be the beginning of a retreat, with the sale of its Blinkbox streaming service and Tesco Broadband to Talk Talk.

Whether this was a decision driven by a strategy or by the simple need to pay for some of its other reforms is unknown, as is the amount it's getting for the businesses. Blinkbox is rumoured to have gone for around £5m, which would be relatively small change for Britain's largest supermarket.

It will take time to see how effective these measures will be at returning Tesco to growth. Don't expect that to happen any time soon, though. Tesco hasn't revised its £1.4bn profit forecast for the financial year, meaning it doesn't anticipate any improvement over the next three months. Lewis had better hope investors are patient.

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