Tesco PLC Names 43 Stores Set For Closure, But Will Drastic Dave’s Strategy Work?

Up until recently, everything looked entirely bleak at Tesco (LSE: TSCO). It seemed besieged on all sides throughout Phillip Clarke’s doomed reign. The value on offer at the relentless discounters Lidl and Aldi chipped away at Tesco’s market share, which now slouches 3% below its peak in 2007.

Clearly, something drastic was needed.

Enter New CEO “Drastic Dave” Lewis.

Renowned for not being afraid to challenge the status quo in past roles, Mr Lewis spared no time in executing a significant change in strategy at Tesco. Earlier this month, he announced the eventual closure of 43 unprofitable stores along with an office in Cheshunt.

Today, Tesco revealed the stores to be closed.

Tesco Express: Bearwood, Belvedere, Church Street Ballymena, Heaton Chapel, Heybridge Essex, Houghton Regis, Liverpool Kensington, Longbridge Road Barking, Northfield Birmingham, Raymouth Lane Worksop, Sheffield Manor, South Tottenham High Road, Tredegar, Troon, Walsall Wood, Wealdstone, Whitley Bay, York Road Hartlepool.

Tesco Homeplus: Bristol Cribbs, Chelmsford, Chester, Edinburgh, Southampton, Staines.

Tesco Metro: Bicester, Bootle, Caerphilly, Crossgates, Devizes, Grangemouth, Mexborough, Morecombe, Ormskirk, Runcorn, Smethwick, Woodseats.

Tesco Superstores: Bedlington, Chatham, Connswater, Cregagh Road, Doncaster, Kirkcaldy, Wrexham Doods Lane.

In the grand scheme of Tesco’s 3,300 store UK empire, the closures are unlikely to right the business by themselves.

But I draw confidence in Mr Lewis from the decisive action; he is not afraid to make unpopular decisions for the good of shareholders.

Indeed, the cutting of the 2014/15 final dividend is another choice that Mr Lewis is likely to receive shareholder grief from, especially considering that Tesco had been a safe haven for income investors for years.

There is no denying it is the right thing to do for the company going forward. Mr Lewis has obviously identified the weakness in Tesco’s balance sheet and has also proposed selling Tesco Broadband, Blinkbox and significantly, Dunhumby data processing to find cash to free it up. The latter alone could fetch over £2bn to bolster the supermarket and provide the capital needed to kick-start its new turnaround strategy, which is focused on becoming competitive in the UK market again.

The company has vowed to continue price reductions in order to retain custom and hopefully win back some of the discounting defectors, although this is likely to result in lower margins in the short-term.

Mr Lewis’ second move has been to reduce the number of products available in Tesco, so don’t be surprised if there are only four different kinds of tomato soup on your next visit, not eight.The reasoning behind this is simple; a reduction in range allows Tesco to focus on bulk-buying from its best suppliers, creating price advantages that can be passed on the customer without harming margins. This practice is key to how the discounters operate so efficiently.

This decisive battle plan encourages me. Tesco is gathering its resources to facilitate a massive shake-up of its operations, in a simple and targeted enough manner that I believe it could work. But Tesco’s recovery is no sure thing. Momentum is against it, and transforming a business as big as this will take time. I wouldn’t be surprised if there were a few hiccups along the way either, in fact I’d be more surprised if there weren’t.

But that’s investing – companies rarely march straight to success, and even if they do a falling market can trash the share price of the most successful organisations. That is why every investor needs a plan for that inevitable moment when things don’t turn out as expected.

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Zach Coffell 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.