As Tesco’s Dave Lewis prepares to step down, what challenges await Ken Murphy?

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As Tesco’s ‘Drastic Dave’ prepares to hand over the reins with the supermarket back on a strong footing, what challenges await the Boots exec replacing him?

  • Tesco boss Dave Lewis revealed plans to step down next summer earlier today
  • He has been widely credited with successfully turning the grocery giant around
  • Will his successor Ken Murphy from Boots keep Tesco on the right path?

Tesco boss Dave Lewis (above) revealed plans to step down next summer

Tesco boss Dave Lewis (above) revealed plans to step down next summer

And the award for understatement of the year goes to… outgoing Tesco boss Dave Lewis, who blithely said today: ‘When I arrived, Tesco was in a difficult place.’

In fact, when Lewis took the helm at the UK’s biggest supermarket in 2014, the company was on its knees. 

Under the disastrous leadership of Philip Clarke, the firm had over-expanded and become distracted by numerous side projects like Dobbies, Giraffe and Harris + Hoole (to name but a few). 

Tesco neglected its UK food business, suffered a string of profit warnings and slashed its dividend by 75 per cent.

But that wasn’t the worst of it. 

Soon after Lewis’s appointment (which was brought forward by a month) an accounting scandal broke – revealing ‘book cooking’ on such a scale that the company endured substantial reputational damage, and was forced to report the largest annual profit fall in UK retail history.

It’s hard to underestimate the scale of the task Lewis faced as he got his feet under the table – not just drawing a line under the scandal but bringing Tesco back from a catastrophic £6.33billion loss.

All-the-while, he juggled the march of the discounters Aldi and Lidl, consumer uncertainty around Brexit, a weak pound and fast-changing shopping habits.

The context makes today’s better-than-expected sales and profits seem all the more impressive so, as Lewis revealed his plans to step down, many in the City hurried to praise him.

Under previous management, Tesco neglected its UK food business, suffered a string of profit warnings and slashed its dividend by 75 per cent

Under previous management, Tesco neglected its UK food business, suffered a string of profit warnings and slashed its dividend by 75 per cent

‘Fast forward five years and the business is almost unrecognisable,’ gushed Richard Hunter, head of markets at Interactive Investor.  

‘Three cheers for Dave Lewis, the man who stopped Tesco from sinking into a deep hole,’ added Russ Mould from AJ Bell.    

Lewis emphasised today that his five-year turnaround plan is ‘complete’, with all his personal targets being met. 

Net debt has been reduced, group margin goals have been achieved, Tesco’s position in the grocery market has been restored and the firm has even pulled off the acquisition of Booker, which Hunter dubbed a ‘masterstroke’. 

As Steve Miley, a senior market analyst at Ask Traders puts it: ‘The journey was not easy. But Tesco has emerged stronger than ever.’

Still, plenty of challenges remain for Tesco as it transitions from a period of turnaround to one of growth. 

Discounters are continuing to gnaw away at the grocery market at speed, ensuring that competition across the sector remains as fierce as ever. 

According to Kantar, Tesco’s market share recently slipped from 27.4 per cent to 26.9 per cent, while Aldi gained shoppers to gain a handle on 8.1 per cent of the market. 

This points to future margin pressure for Tesco, as it will need to keep cutting prices and costs (or offloading assets as it did recently with its mortgage book) to remain competitive. 

There’s also the possible ramifications of a no-deal Brexit, which – as widely documented – could cause particular issues for the supermarket and retail sectors. 

As Neil Wilson from Markets.com says, ‘Brexit is the unknown item in bagging area,’ despite Lewis’s assertions today that a ‘very comprehensive mitigation plan’ is in place. 

Some questions also remain over Tesco’s new discount chain ‘Jack’s’. The closure of one of its Jack’s stores last month, barely a year after the concept launched, is not a good sign for the future of the trial.     

There’s speculation too that the business may look to offload its troubled Polish division, where weak sales are dragging on Tesco’s Central Europe division. 

As Hunter says: ‘In this notoriously cut-throat sector, a new threat is always around the corner. Be that in the form of the discounters, the potential emergence of Amazon in this space, or the next price war.’     

Questions remain over the future of Tesco's new discount chain 'Jack's', which the company launched less than a year ago

Questions remain over the future of Tesco’s new discount chain ‘Jack’s’, which the company launched less than a year ago

So it’s over to new recruit Ken Murphy, but how will the 52-year-old Irishman cope? 

Murphy’s appointment initially raised some eyebrows, largely because the former Walgreens Boots Alliance CCO, who rose through the ranks, doesn’t have any specific grocery experience.  

But Tesco chairman John Allen defended the hire, dubbing Murphy a ‘growth orientated seasoned business leader’.

The firm argued that Murphy will not be in entirely uncharted waters because Walgreens sells food and he, like Lewis, also has experience in the Fast Moving Consumer Goods (FMCG) industry. 

Allen emphasised that the search process was ‘very, very thorough indeed’ as he spent nearly a year hunting for suitable experience, proven leadership in international retail and a strong strategic mind.  

Murphy secured a commerce degree in University College Cork before going on to study at Harvard Business School. 

Commenting on the incoming chief, Wilson says: ‘Ken Murphy has solid pedigree, coming from Walgreens Boots Alliance.’

Walgreens Boots has, like Tesco, been through heavy cost cutting amid pressure on earnings, which Wilson believes will give Murphy a head start when he steps into Lewis’s shoes. 

‘He’ll need to employ these skills at Tesco where he’ll have to contend with tougher organic comparisons post the Lewis era. Moreover the battle with the discounters is only just starting,’ Wilson says.  

Micheal Hewson from CMC Markets, however, says it is ‘puzzling’ that Tesco decided to go with an outsider to replace Lewis, particularly given the success of the last five years. 

‘Only time will tell, but the fact they’ve gone with an outsider is a strange one,’ he says. 

Either way, investors didn’t seem too perturbed, as shares remained broadly flat at £2.39 after the announcement. 

However, it’s possible shareholders opted to focus instead on the better-than-expected results and the dividend hike for now. 

If investors do decide to walk away with Lewis, they have until next summer to do so. 

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