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Can Dave Lewis Turn Tesco PLC Around?

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There’s always a buzz when a new boss comes in, even when people don’t really know much about them, such as Dave Lewis at Tesco (LSE: TSCO).

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Lewis has been given the task of turning round Britain’s biggest retailer, and started by popping up on YouTube, talking about his “rollercoaster” first week, and saying he won’t shy away from the “difficult calls” that need to be made.

And he’d better not. Because he has to make an awful lot of difficult calls, and he has to get them right.

Riding The Roller Coaster

Investors have to make difficult calls as well. Once-mighty Tesco has been in a precipitous decline, with two profit warnings in two months, and a 36% drop in the share price this year.

Its dividend has been slashed by 75%, and the road to restoration will be long and dreary. As a recovery play, it looks tempting, especially trading at just 9.63 times earnings.

But you should brace yourself for a roller-coaster ride as well. 

Call Me Dave

The big four supermarkets all face a battle against sectoral decline. It doesn’t help that fierce new competitors Aldi and Lidl are privately owned, and can do what it takes to bring down the big guns without having to placate shareholders.

Dave Lewis isn’t naive. He has seen how low morale is at Tesco right now. Boosting that is one of his key priorities, but he will struggle to do that unless the numbers improve, and time isn’t on his side.

He also knows that the Tesco brand is tarnished.

So far, we don’t know his strategy. I don’t think Lewis knows it, either. He has pledged to return to the core of Tesco’s business, “in price, availability and service”, and rebuild customer loyalty.

Returning to core values is something nearly every struggling organisation pledges to do. It is easier said than done.

War? What Is It Good for?

Lewis will have to fight hard to win back lost customers, who remain cynical about the Tesco brand, and unhappy with its customer service.

He will no doubt start off by throwing money at the problem, splurging the estimated £800m saving from cutting the dividend on slashing prices. There has also been talk of job losses, which should lift his war chest up to £1.3bn (and possibly lower morale further).

Taking the price war to Aldi and Lidl is risky, however, because it looks like fighting on their home turf.

Difficult Times Lie Ahead

Lewis will also have to square that strategy against the apparently contradictory recent aim of revamping stores to make them more of a “destination”. In other words, he must decide whether Tesco is going upmarket, or downmarket.

It will struggle to do both at the same time.

If Tesco’s Giraffe restaurants and Harris+Hoole coffee shops aren’t pulling in the punters, let’s hope Lewis doesn’t find the decision to close them too difficult.

Low wage growth is a wider problem, and he can’t do anything about that. If shoppers had a bit more cash in their pockets, maybe they wouldn’t revile Tesco so much.

Tesco Turnaround

As Morrisons has shown lately, it is possible to reverse the decline in market share, with short-term cost slashing back by a pricey advertising campaign. Lewis could well follow that strategy, even at the expense of Tesco’s margins.

But the downward trend will be difficult to reverse, as shopping habits change, consumer loyalty collapses, and Tesco remains the big, bad brand people love to hate.

On the plus side, that should also make taking those difficult decisions a lot easier for Dave Lewis.

I sold out of Tesco a year or so ago at 335p. At 224p, it might just be worth a punt. But until we know the new man’s strategy, the decision to buy will remain difficult.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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