Tesco PLC: How This Company Can Be Turned Around

TescoIn the 1980s, Sainsbury’s used to be the leading supermarket in the UK — it was way ahead of its competitors. Its profits, and its share price, rocketed. But every trend eventually comes to an end, and Sainsbury seemed to lose its way and was overtaken by a more ambitious Tesco (LSE: TSCO). Tesco built more supermarkets and local stores, expanded its product ranges, grabbed a slice of the internet shopping market, and expanded abroad.

Now, it seems, it is Tesco that is being overtaken by events and trends. Whereas, a decade ago, Tesco’s idea of being a one-stop shop where you bought not just your groceries, but products ranging from LCD TVs to clothes and furniture, made the company unbeatable, now there are newer, fresher ideas.

Newer, fresher ideas

People are realising that many of Aldi’s and Lidl’s products are better value. They find their shopping trips to Waitrose and Sainsbury’s an altogether a more enjoyable experience.

But I think there is more to Tesco’s decline than this. When Terry Leahy was at the helm, you had a clear picture of what his strategy was. He was expanding Tesco as a multi-channel retailer in the UK, and also investing much of these profits to grow Tesco in a range of markets abroad.

Today I don’t really have a clear picture of what Tesco’s strategy is. It seems to have given up building more supermarkets in the UK. It is refitting many of its UK supermarkets, but I’m not really sure whether the shopping experience has been improved.

You would have argued that the best opportunity for growth would be expanding abroad, but instead of building or buying more supermarkets, Tesco seems to be closing supermarkets.

Overall, things seem to be a bit of a mess. Tesco seems in danger of falling into a decline rather like Sainsbury’s all those years ago.

The consumer is key

So how can new chief executive Dave Lewis turn things around?

Well, I suspect the first thing he will do is get the basics right. Lewis is, like Leahy, a marketing man, and his experience at Unilever will have taught him to focus on the consumer. This means providing products that the consumer wants, at competitive prices. It means providing a better shopping experience, across all channels. Everything else is irrelevant. Can you make Tesco the Next of supermarket retail?

A crucial decision he will have to make is whether to retrench abroad, or whether to expand. My own view is that expanding abroad is Tesco’s opportunity to grow its profits and share price further. But growth abroad has to be carefully managed, otherwise profits can quickly turn to losses.

Lewis has a difficult task ahead of him. But he has seen how consumer goods giant Unilever has reinvented itself. Tesco can do the same.

Prabhat Sakya has no position in any shares mentioned. The Motley Fool owns shares of Tesco.