There was nowhere to hide for Tesco CEO Philip Clarke this week, after the worst Christmas results in 20 years. Bottom of the class, Tesco’s 2.3% year-on-year decline in like-for-likes shocked the City, as even house brokers downgraded their profit estimates.

Clarke was forthright in his assessment of Tesco’s “long-standing issues”, and he announced it would pour hundreds of millions into a 12-month programme to get its UK operation back on track.

And the ramifications will be felt far beyond retail, with the construction industry sure to suffer as Tesco slams the brakes on its relentless UK store rollout, something Clarke ruled out strongly as recently as October. “We’ll see more stores,” said Clarke, but there will be few to no more Extras. The focus will switch to online.

Internet sales grew by 14% over Christmas and Tesco’s plans this year include further expansion of its click and collect service, opening more dark stores and the launch of an online marketplace to rival eBay.

Tesco’s version of a crisis is one that any other retailer would die for, but Clarke’s admissions were nevertheless unheard of, with the success of the group in areas such as Asia and the US completely overshadowed, as Tesco’s UK share in the last year slipped from 30.5% to 30.1% despite its huge investment in extra space [Kantar 12 w/e 25 December 2011]. And the 2010 figure, in itself, represents a decline on five years ago (see table).

Clarke strongly defended the Big Price Drop programme this week. “The Big Price Drop has not been a gimmick. It’s not something that’s failed,” he says. “I’m very pleased with where we are on price.”

He does admit, however, that Tesco relied too much on price as opposed to coupon-based promotional activity. “I regret we backed off. We didn’t deluge customers with coupons over Christmas. With hindsight we should have done both.”

Instead the Big Price Drop served only to fire up an opposition playing the smartest game Tesco has faced in years. Clarke also admitted that despite availability improvements, Tesco faces ongoing issues concerning range, in-store ambience and staff.

He also set a 12-month deadline during which group profits will be sacrificed to try to turn around the UK, with the financial headroom reinvested in better ranges, service and store environment - all of which he admitted were not good enough.

“We need to address these longstanding issues,” said Clarke. “It’s not price [that’s the problem]. It’s range, quality and service. For a while we’ve not been where we’d like. We’ve been driving productivity too hard. We’ve run hot for too long and it’s affecting most elements of our shopping trip.”

Clarke says the job of transforming that experience has already begun, with trials at 12 Tesco stores recently extended to cover 200, which will focus initially on making major improvements to Tesco’s fresh food offering, both in range and the level and skill of staff.

Other than pledging to throw hundreds of millions at the strategy, many of the promises are vague, with April’s results set to see more details emerge.

But the strategic announcements have not come a moment too soon for experts and industry insiders alike.

Stuck in the middle
One former supermarket boss believes: “Tesco is experiencing what happens when a retailer ends up stuck in the middle of the market.

“If you think back to what happened to Safeway or to Sainsbury’s pre-Jamie Oliver, the same is happening to Tesco now. It’s finding its share under attack at both ends, with Waitrose and M&S at the premium end and the discounters also stealing share.

“What they do next is important. Tesco are at their best when they think strategically and not when it’s kneejerk. The Price Drop has come across as kneejerk.”

Natalie Berg, an analyst at Planet Retail adds: “They’ve become too price-focused but value for money is not just about pricing.”

And Bryan Roberts, an analyst at Kantar Retail, believes an air of complacency “reminiscent of Sainsbury’s in the early 1990s has crept in. Every Little Helps is well beyond its best-before date,” Roberts adds.

“The Big Price Drop is obviously not working, or if it is, it needs to be more fundamental. But for me by far the biggest priority for them in the UK is to sort out food. If they can sort that out the rest will follow.”

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