Tesco (LSE: TSCO) has a new boss: after one profit warning too many, Tesco lifer Philip Clarke has agreed to abdicate.
Mr Clarke’s successor, Dave Lewis, was previously head of the Personal Care division at Unilever (LSE: ULVR), a firm whose performance has comprehensively outclassed Tesco over the last five years:
| 5yr. share price gain | 5yr average dividend growth | 5yr average operating margin growth | 5yr average sales growth | |
| Unilever | +85% | 7.2% | 3.7% | 4.6% |
| Tesco | -23% | 2.5% | -7.6% | 2.2% |
Although some of Unilever’s outperformance is due to its much higher profit margins — Tesco cannot aspire to Unilever’s 15% operating margin — some of Unilever’s success is down to the way its senior management, including Dave Lewis, have maximised the potential of its brands in multiple markets around the world.
I reckon there are a number of ways in which Mr Lewis can apply the lessons of Unilever’s long-running success to Tesco, in order to kick-start the firm’s turnaround:
1. Don’t be afraid to change
Unilever has recently been divesting some of its food products, which remain profitable but have limited growth potential.
Mr Lewis may feel that some of Tesco’s operations — such as those in Europe — fall into the same category.
Another possibility is that Mr Lewis will take a more brutal approach to the firm’s underperforming UK hypermarkets, by accelerating a trial programme to reduce store size and let the extra space to tenants, rather than filling space by introducing the firm’s non-core café and restaurant brands to large stores.
2. Go where the profits are
Unilever’s relentless focus on profit has driven strong shareholder returns.
This could be another argument in favour of selling Tesco’s European business, which ties up a lot of capital but has a trading margin of just 2.6%, compared to 5% in the UK and 6.7% in Asia.
3. Maximise brand potential
Many of Unilever’s products are almost indistinguishable from cheaper own-branded equivalents. The difference — and the reason people will pay more for them — is the power of Unilever’s brands.
Mr Lewis has been responsible for some of Unilever’s most successful marketing campaigns, and I suspect that he will find new ways of exploiting the potential of Tesco’s brand, and helping the firm recapture the loyalty of British shoppers.
4. Understanding emerging markets
Unilever has a long history of tailoring its products to the needs of new markets, and successfully launching in those markets.
I expect Mr Lewis to use his experience in overseas markets, including Asia, to help develop Tesco’s highly profitable Asian operations, which I believe have significant growth potential.
