Is Tesco taking a step in the right direction - or are the problems piling up for CEO Philip Clarke?

Rocked by its first fall in group profits for nearly 20 years, embattled Tesco CEO Philip Clarke was on the back foot yet again, as signs that the £1bn turnaround plans for the UK heartland were starting to bear fruit - with 0.1% like-for-like sales growth in Q2, excluding VAT and petrol, reversing a 1.5% decline in the first quarter - were tarnished by grim news from Asia, Central Europe and the US.

So, is the £1bn UK store turnaround working? Tesco’s tentative recovery in the UK has been credited to its £1bn store investment programme, including investment in 300,000 extra staffing hours, retraining and store refurbishment across all its formats. Yet just 230 stores have seen refurbishment work in the first half.

“With only a fraction of the estate refreshed, Tesco has a long way to go before improved stores start to have a tangible impact on the sales line,” says Neil Saunders, managing director of Conlumino, who claims the stores refreshes to date are “lacklustre” and claims Tesco’s upwards trajectory in sales is more to do with “increased levels of discounting and promotional activity, especially in the form of couponing.”

Clarke says stores that have received extra staff - 8,000 full-time equivalents will represent four per store - have seen a 1.1% sales uplift. And the refurbishment programme is on track, with some supermarket experts more glowing in their praise than Saunders. On the other hand, a 1.1% uplift isn’t that much.

What, then, has Clarke got to show for his changes so far? The most immediate impact has been the 500-strong launch of Everyday Value this April. It came not a moment too soon, for Clarke and for Tesco, accounting for virtually all of Tesco’s sales growth - as 10% more customers bought from its new entry-level range in Q2. With 100 frozen products added to the range last week, Clarke claims customers are increasingly “trading down”, and the launch of Everyday Value Christmas pudding this year is a sign of the times if ever there was one.

What about inflation? Clarke joined Sainsbury’s boss Justin King this week in warning of a food inflation crisis in the run-up to Christmas, and this could be a real fly in the ointment, says a former supermarket CEO.

“Tesco must be under huge pressure to increase prices but they won’t want to be the first to do so. The next six months will be really revealing to see to what extent Tesco sees itself as a discount retailer.”

Should the focus be on big box retail, convenience or the internet? Philip Clarke gave the clearest indications yet that he was calling time on the space race. “We’re still going to open stores but they will be smaller ones: convenience stores and internet-only stores,” he said at this week’s results. And he admitted it will pull out of a mass of planning applications where it has plans pending local approval for larger stores.

But the bigger admission surrounds the future of its 234 Extra stores. By his own admission, Clarke said its big-box stores - despite their low cost per sq ft, and the bigger basket shops they attracted, faced becoming white elephants. He told The Grocer that Tesco was considering sub-leasing space within its Extras, targeting restaurants such as Nando’s, while it may also consider converting whole top floors of the giant stores to F&F clothing departments.

But converting Extra sites into mini-malls comes with huge problems of its own. Not only will it risk anger over the impact of out-of-town development on the high street, finding would-be tenants will be far from easy, with other retailers suffering exactly the same problems that saw Tesco’s seismic shift in the first place.

“A huge question for Tesco is how it gets return on its capital,” says a City source. “It is faced with having a network of Extra stores which it admits are in some ways obsolete, yet closing them down isn’t really an option.”

Can Clarke find a way for Fresh & Easy to make a profit? Philip Dorgan, analyst at Panmure Gordon, this week said shares in Tesco would “rocket” if it closed or sold its US operation. The US Fresh & Easy chain continues to plague Clarke, with a further £74m in losses chalked up in the first half, albeit a slight improvement. Clarke slammed the brakes on expansion in April, putting a halt on 30 new stores, but only 85 of its 200 stores are so far in the black despite efforts to improve profitability.

“We regard the debate on when it will break even as irrelevant,” adds Investec analyst Dave McCarthy, damningly. “The real question is when the US will start to make good returns and a meaningful contribution to group profits, to justify the extensive management time and resource devoted to it.”

Was there any good news overseas? Thailand, where sales were up 14%, delivered the best performance, but profits in Asia fell as new restrictions on Sunday opening times in Korea, its other ‘jewel’, were predicted to wipe £100m off profits. And profits in Central Europe also declined as the crisis over the Euro translated into a 6.8% fall at local currency rates.

Can a new marketing agency help Tesco? It’s nearly three months since Wieden & Kennedy snapped up one of the biggest prizes in marketing with the £110m Tesco advertising account. Its first big move will be a major Christmas advertising campaign in the run-up to Christmas. “You’re gonna like it. But not a lot,” joked Clarke at this week’s results, using a catchphrase that presumably won’t be replacing Every Little Helps - although it might as well, says one former insider. “At the moment it’s a brand that is virtually impossible to love.”

Can he do better than Brasher in the run-up to Christmas? The disastrous UK Christmas trading period last year saw former UK chief executive Richard Brasher stand down. This week, The Grocer revealed that Brasher is off to sunnier climes - in both senses of the word (p78), plying his trade in South Africa, as the new boss of Capetown-based Pick n Pay.

Clarke claimed this week the “profit reset” necessitated by the £1bn UK store turnaround was the start of a “new chapter.” But he also acknowledged that despite the global tumults the “real question” facing Tesco’s strategy remains the UK’s continuing profitability.

“So many successful global companies have lost their way in their home market. I will not allow that to happen and I could feel it was,” he said. But he also predicted that economic conditions in the UK would remain “very challenging”.

“I wouldn’t overestimate the importance of a 0.1% rise in like-for-likes,” says the former insider. “It’s still sh*t and not in the same league as Tesco’s recent track record, but it’s a start.”

Adds the former supermarket boss: “The biggest challenge for Clarke must be to get availability and service right at Christmas. If he doesn’t do that there’s going to be a big question mark over him.”