dave lewis

As Tesco records its first quarter of UK sales growth in three years, what do this week’s results say about the state of boss Dave Lewis’ turnaround plans?

1. Tesco believes it is closing the price gap with discounters: Lewis credits the recent launch of its 76 Farm brand products with making prices more competitive. Before the launch, he says Tesco was £13 more expensive than the discounters on a basket of 51 comparable brands. That basket price is now down from £103.11 to £86.35, undercutting the discounters’ previous price by at least £3. The supermarket’s focus is firmly on low prices rather than offers - Tesco issued 37% fewer coupons across the year with Q4 multibuys down 32%.

2. Shoppers have less reason to go elsewhere – but still some reason: ‘Serving shoppers a little better every day’ may be Tesco’s official new mantra but persuading them to do more of their shopping under one roof is Lewis’ number one mission. This means making sure all of its lines are competitive. Lewis admits fresh produce, meat, fish, poultry, eggs, frozen and bakery have “clearly had an issue in terms of the entry price” compared with the discounters – a problem Farm brands has only partially tackled. It’s a hint Tesco has more own-brand launches and price cuts up its sleeve in these areas. But extending the price cuts to areas outside the fresh lines already brought in will bite further into Tesco’s profits, which is causing trepidation among City analysts (see point 4).

3. Extra stores need new partners to become destinations: When asked whether Tesco has succeeded in making Extras “destination stores”, UK CEO Matt Davies tells The Grocer that the figures “say it all”. “If you look at where the business was, we were running at minus 6% like-for-like growth in our Extras. Through re-establishing them as a destination, we’ve been able to get our like for likes close to flat and positive over Christmas.”

Yet on closer inspection, it’s clear that Tesco’s biggest stores aren’t out of the woods yet. The “close to flat” 0.3% fall in like-for-like sales in Q4 referenced by Davies was bolstered by online sales – though we don’t know how much – and growth lags behind the 3% seen in Express in the same quarter.

The supermarket is now actively looking to replicate tie-ups such as the one with Arcadia last year, which has seen trial stores open branches of Dorothy Perkins, Burton and Evans beside F&F. Other trials have seen it link with Sports Direct. “We’re starting to see the largest stores morph into mall-like stores,” Davies says. But with such stiff competition from the discounters and existing malls, Tesco will not find it easy to get the ‘halo’ effect it has seen from such partnerships in Thailand. It will need to do some canny wheeling to make use of surplus space in its UK stores and avoid Extras becoming white elephants.

4. Tesco’s profit forecasts don’t cut the mustard with the City: There would be no “straightline recovery” warned Lewis, words that struck fear into the City and left analysts questioning somewhat cloudy longer-term forecasts. Tesco says it is “increasingly confident” of a “continued improvement in profitability” and long-term value for shareholders. But Lewis admitted its plans for further “investment in our offer”, including own-label brands and price cuts, would put a strain on profits. He also says market conditions remain “extremely difficult and uncertain” with no end in sight to “an unprecedented period of deflation” in the sector.

Bruno Monteyne, senior analyst at Bernstein, questions Tesco’s claim of “continued improvement in profitability”.“The full-year 2016/17 margin could be expected to be at the same level (1.6% to 1.7%) of H2 of last year,” says Monteyne. “We would not call that ‘continued improvement in profitability’, but would call that stagnating profits for 12 months.

“This is even more disappointing combined with the fact that Tesco has bought back lease properties, which inherently boost EBIT levels.”

Others were more glowing, with John Ibbotson, director of consultants Retail Vision, saying Lewis had pulled off an “extraordinary feat” akin to “turning around an oil tanker.”

5. Project Reset is still a work in progress: In its drive for rationalisation, Tesco slashed the range of SKUs across all 33 food categories by an average of 18% in 2015/16. The cull was much greater in areas such as wine, which saw 30% of products come out, and health and beauty, which saw SKUs cut by a quarter. It claims this has helped lead to record availability of 96% and a price reduction of up to 12% on the affected lines. The supermarket will now further apply the strategy to its Express range, which has been barely touched by Reset.

“The simplification process at Tesco is root and branch, embodying a lot of hard, diligent, sustained and somewhat below-the-radar work by management,” says Shore Capital analyst Clive Black.

6. Dave doesn’t care what critics think about ‘fake farms’: Lewis claims consumers are “far more savvy” than those crying accusations of duping would have you believe. “All good marketing will always polarise,” he argues.

And polarise it has. Desipte the fuss about the so-called “fake farm brands”, launched last month, many analysts have welcomed the move as a sign of Tesco’s recovery. A year ago, Tesco was too busy “firefighting” to even dream of launching the brands, says one source.

7. Tesco is sticking with Brand Guarantee: Lewis stresses it is a key part of plans, despite others jettisoning such schemes. Tesco cheekily took a swipe at Sainsbury’s cull of Brand Match this week by offering to accept vouchers from disgruntled shoppers until June. Although little more than a PR stunt, it went down well with Tesco sources, who claim the launch of Brand Guarantee last October effectively killed off Brand Match – once a pioneering weapon for its rival.

8. Capex is back on the rise: There were signs of a strategy backtrack in this week’s results, with Tesco announcing plans to reverse the £800m slash to capital expenditure seen in 2014/15. Group capex will rise from £1bn in 2015/16 to £1.25bn this year, to be split between store refreshes in the UK and accelerated openings in Thailand.

9. The future looks uncertain for Giraffe, Dobbies and co: Lewis resisted all attempts to get him to comment on plans for external ventures, which many analysts believe will be jettisoned in line with his ruthless clear-out of “non-core” assets. This week, Sky News reported Tesco had hired Greenhill to advise on the sale of Dobbies, with Giraffe and Harris + Hoole already reportedly on the chopping block. Last month, The Grocer revealed Tesco was to axe its long-running health store brand Nutricentre as part of the cull of non-core activity.

10. Tesco has become less ambitious in online: Growth from online shopping was far slower than the 25% year on year figure it enjoyed a few years ago. Setting massive targets for online growth is “not something we want to pursue”, said Lewis, adding Tesco wanted to be “more realistic” about the potential to make money out of digital. Davies says Tesco will continue “finessing” its charges for services such as online delivery, a reference to its slapping on higher expenditure requirements for minimum orders last year and imposing new charges on areas such as non-food click & collect.