Tesco PLC’s One Big Mistake

Why things should eventually come good at Tesco PLC (LON:TSCO).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

On paper, Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) should be doing better than it is. True, austerity has tightened shoppers’ belts. The major supermarket chains have lost sales to the cheap n’ cheerful hard-discounters Aldi and Lidl, while upmarket Waitrose and Marks and Spencer have introduced value ranges.

But Tesco has far and away the biggest market share and it has consistently been the innovator of the sector, leading in non-grocery sales, convenience stores, online shopping, loyalty cards, overseas expansion, banking and restaurants. It should at least be holding its own. Its UK turnaround programme, launched after Tesco issued its first-ever profits warning in January 2012, ought to be showing results.

Instead, the company is struggling. The market expects to see a fall in earnings of some 10% when Tesco announces annual results on April 16th. The shares are at their lowest for 10 years.

TescoOne big mistake

It’s hard not to point the finger at bad management. I think Philip Clarke made one big mistake when he became CEO in 2011: he sacked rival Richard Brasher, who ran the UK arm, and took on the job of directly running the UK business himself along with the group CEO role. With crises in the UK and overseas, doing both jobs has proved too much.

There have been several other high-level departures from the cadre of long-serving company executives, including Tim Mason — the marketing director and inventor of the Clubcard who went to run (and then sell) Fresh & Easy in the US — as well as the Head of Asia and the boss of Tesco Bank. It smacks of a management style that brooks no dissent. But there’s only Mr Clarke left standing now…

Last December I pointed out how good companies can go bad through ‘active inertia’, with management who are stuck in old ways of thinking doomed to repeat past mistakes. I mooted that investors may soon lose patience with Mr Clarke — and I think that time has just got nearer.

But still a great company

But investors shouldn’t lose patience with Tesco itself. It’s still one of the world’s largest supermarket chains. Its UK market share has slipped, but commanding 29% of the market when the next nearest has 18% still leaves it in a powerful position.

What’s more, Tesco has historically enjoyed the strongest margins, but has recently relaxed its 5.2% target. It’s a late change of strategy, but one that gives the company tremendous firepower in the supermarket price wars. Even if there has to be a change of Commander-in-Chief, Tesco’s strengths should show through in eventual victory.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Tony owns shares in Tesco but no other shares mentioned in this article. The Motley Fool owns shares in Tesco.

 

More on Investing Articles

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Here’s how I’d aim to build a £50K SIPP into a £250K retirement fund

Our writer outlines the approach he would take to try and increase the value of his SIPP multiple times in…

Read more »

Investing Articles

9.4%+ yields! 3 proven FTSE 100 dividend payers I’d buy for my Stocks and Shares ISA

Our writer highlights a trio of FTSE 100 shares with yields close to 10%. He'd happily pop them into his…

Read more »

Mixed-race female couple enjoying themselves on a walk
Investing Articles

Are Raspberry Pi shares a once-in-a-lifetime chance to get rich?

With Raspberry Pi shares surging after a successful IPO, could this UK tech startup offer a long-term wealth creation opportunity…

Read more »

Newspaper and direction sign with investment options
Investing Articles

Huge gains and 9% yields: why now’s an amazing time to be a stock market investor

The stock market’s generating fantastic returns in 2024. Whether you're looking for gains or income, it’s a great time to…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

This steady dividend payer looks like one of the best bargain stocks in the FTSE 100

A yield of 4.7% and a consistent dividend record make this FTSE 100 company look like good value in an…

Read more »