Interactive Investor

Tesco swaps Clarke for Unilever's Lewis

21st July 2014 13:45

Harriet Mann from interactive investor

Despite insisting just weeks ago that he would not resign, Tesco boss Philip Clarke has fallen on his sword following yet another profits warning from the struggling supermarket on Monday. For now, the City is betting that new boy Dave Lewis, being parachuted in from Unilever, can restore pride at the fallen giant, although the term poisoned chalice springs to mind here.

Clearly, Mr Lewis has a job on his hands. Business has been even worse than Tesco imagined when it published first-quarter figures six weeks ago. A further downturn and increased investment to win back customers from more nimble rivals will leave first-half sales and trading profit "somewhat below expectations," it says. And massive price cuts must work if Tesco is to claw back any of the shortfall during the rest of the year.

"Tesco has simply not been able to compete against its own peer group, let alone the discounters or the high-end grocers and the erosion in their market share has seen their share price slump," says Rebecca O'Keeffe, head of investment at Interactive Investor. The group's share price has fallen from 370p 12 months ago to 285p at Friday's close. After a small rise to 292p on Monday, the firm is valued at £23.7 billion.

After 40 years at the grocer, Clarke will step down as chief executive in October to make way for Dave Lewis, currently global president of personal care at Unilever where he's worked for the past 28 years. But can he reverse Tesco's fortunes after three successive years of falling sales?

Investors and analysts alike seem to think that a fresh view provided by an external appointment is exactly what Tesco needs. The incoming boss has been working both directly and indirectly with Tesco over the years and is "well-known within the business," Clarke said.

Lewis, who'll be paid £1.25 million a year plus bonuses and share incentives, has been responsible for a number of turnarounds at Unilever in his time there, and his international experience, having been chairman for Unilever UK and Ireland and president for the Americas, could help boost Tesco's performance overseas. Part of Clarke's predecessor Terry Leahy's legacy, it's an area where Tesco has struggled in recent years - international sales were flat in the first quarter, although the strong pound caused an 8% slump.

"The hapless Phil Clarke never won over the City nor did his achievements (or lack of!) as CEO," says Marc Kimsey, senior trader at Accendo Markets. "Profit warnings and failed ventures, mainly overseas, proved just how out of his depth he was. Incoming Dave Lewis appears to be a shrewd appointment with successfully executed turnaround operations under his belt, as well as stints in both the States and Asia - territories Tesco have struggled to crack."

While some think that Leahy was a tough act for Clarke to follow, despite being called the Robert Mugabe of retail, others argue that Clarke was not given enough time to cope with the legacy he inherited.

"When you are on top there is of course only one way to go - down. Leahy had set in train a number of issues and problems that would in the end prove to be both controversial and eventually unworkable - particularly in the international development and expansion of the Tesco brand in America," says consultant Howard Wheeldon.

"I doubt that given the massive entity that Tesco had been allowed to become under Leahy that there was much that Clarke could do to stop the rot. All of a sudden it seemed that Tesco's luck ran out," he adds.

Another firm lagging behind in the supermarket price war is Morrisons, which fell over 2% on Monday. After warning that its full-year profits would halve, the supermarket posted a 7.1% slump in its like-for-like first-quarter sales in May, so is it time for chief executive Dalton Philips to be shown the door? After Sainsbury's chief executive Justin King stepped down last month after two successive quarters of falling sales and ten years at the helm, a trend seems to be emerging. His days look numbered.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.