February 25, 2011 11:06 pm

New Tesco chief faces world of tough challenges

When Philip Clarke walks into the 1960s-style concrete office block in Cheshunt that is Tesco’s headquarters on Tuesday, it will be business as usual, insiders insist.

Mr Clarke will drive to the building on an industrial estate in Hertfordshire from his home four miles away in Cuffley, where he lives on the same street as Sir Terry Leahy, from whom he is taking over as Tesco chief executive.

A message will go out to staff explaining a little more about the new chief, and then Mr Clarke will be straight into a meeting of his top team.

But when Mr Clarke strides through the HQ’s nondescript reception, his arrival will be far from ordinary. It will mark Tesco’s biggest management transition for 14 years, with the departure of Sir Terry, the most successful retailer of his generation.

“Terry belongs to the hall of retail greats,” says Nick Coulter, an analyst at Nomura, broker to Tesco. “But Phil coming in is a new broom, and [he is] a proved operator.”

Mr Clarke, a Tesco veteran of 36 years who has led the group’s international operations for the past seven, will face a raft of challenges.

Fresh in his memory will be what some analysts estimate was Tesco’s weakest underlying sales performance during the crucial Christmas trading period in the UK for more than 20 years. He also has to decide whether to jettison its fledgling US operation.

Top of Mr Clarke’s to-do list will be addressing the issues facing the UK business, which still accounts for about two-thirds of sales and profits, in spite of the group’s global reach.

“Tesco has got a quite large and powerful engine in the UK, but it is fair to say that for whatever reason it needs some fine-tuning,” says Clive Black, an analyst at Shore Capital. “Tesco has lost some of its momentum in the UK, and Phil Clarke will be highly alive to that.”

In its home market, Tesco faces rivals who are firing on all cylinders. J Sainsbury is proving a nimble adversary, Wm Morrison has recovered from its troubled takeover of Safeway in 2004 and Asda has been emboldened by a punchy price campaign that it claims has “ruffled” rivals.

At the same time, the grocery market has been sluggish, with the non-food business proving particularly challenging.

Against this tough backdrop, British supermarkets – led by Tesco and Sainsbury – are expected to open additional stores in the next five years equivalent to the size of Sainsbury today.

Dave McCarthy, an analyst at Evolution Securities, says the answer is for Mr Clarke to embark on a huge UK price war to cripple the competition and stifle their store opening programmes.

One experienced Tesco-watcher believes much will depend on how long Mr Clarke, who is 50, plans to stay at the helm.

“That is an interesting place to start,” he says. “If you are there on a three-year journey, then probably the thing you would do is carry on with Sir Terry’s strategy.

“If you are thinking for the medium term, it probably means you have got to be more fundamental; [for example] what is your positioning in the UK market? That is the [issue]. All the rest is almost tactical.”

But the UK is not the only issue in Mr Clarke’s in-tray. Tesco has made a big foray into the US with its Fresh & Easy chain, which lost £165m last year. Mr Clarke must decide whether to continue with the venture, or abandon Sir Terry’s American dream.

“Everyone is waiting with bated breath to see if he will have the willingness to underwrite the losses in this wayward division,” says Jim Prevor, who runs the Perishable Pundit blog.

Indications so far are that Mr Clarke will continue with the US business for now. He recently visited the operation.

But, according to Mr Black: “Tesco has said it wants Fresh & Easy to break even by Christmas 2012. If that is demonstrably pie in the sky, I don’t think we will be waiting for 2012 for a decision to be made.”

Meanwhile, in the UK market Tesco is busy building a bank. It has also made a big bet on China and there is a question mark over whether it will continue to operate in Japan.

Mr McCarthy believes the new chief executive will be “big and brave enough to take big decisions if he thinks they are needed”.

Andrew Kasoulis, an analyst at Credit Suisse, says Mr Clarke is a “very good retailer, who is likely to build a high returns business on the foundations that Sir Terry has built over the last 14 years”.

But some people who know the business fear that Mr Clarke, who is described as more accessible than his predecessor but also more political, might struggle to stamp his authority on the group, given that some of his most senior directors will have been his contemporaries – and competitors – for the top job in recent years.

The departure of Laura Wade-Gery to Marks and Spencer also underlines the potential disruption among senior managers who may have harboured ambitions for the top job.

“In one sense Terry left it very orderly in giving it all up, and was very careful in managing his immediate succession,” says one long-time Tesco-watcher.

“But further down the line, things have been left undone.”

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