Tesco to lower costs to fund price cuts
Tesco will slash costs and sell assets to fund lower prices and mend its finances, Britain’s biggest retailer said yesterday, as its new boss set out plans to fight back from years of market share losses and an accounting scandal.
Dave Lewis, poached from Unilever to rescue Tesco from the biggest crisis in the 96-year history, said that he would halve capital spending, scrap the dividend, close the head office, and shut the final salary pension scheme to save money.
He also named Matt Davies, credited with turning round bicycles-to-car parts retailer Halfords, as the head of Tesco’s main UK and Ireland business and said the firm would drop prices by an average 25% on around 380 branded goods to fight back against fast-growing discount supermarkets.
Tesco shares jumped as much as 15% in their biggest one-day rise since 1988, as shareholders expressed relief the firm had not asked them for cash and also took heart from a smaller-than-expected fall in sales over Christmas.
However, Tesco’s bonds fell as debtholders speculated that, with a possible big writedown of the company’s store portfolio still on the cards, the planned asset sales might not be enough to prevent its credit rating from being cut to junk.
Analysts also said the firm would need more price cuts to close the gap on discounters Aldi and Lidl, as well as Asda.
Mr Lewis, dubbed ‘Drastic Dave’ for his radical overhauls of Unilever businesses and the first outsider to lead Tesco in its history, stressed his proposals were just a start, and that further unspecified initiatives were under consideration.
After two decades of uninterrupted growth in which it dominated the British retail landscape, Tesco lost its way when it became distracted by expensive overseas expansion and failed to spot the threat from discount outlets. It was wrongfooted, too, by a boom in local and online shopping that took customers away from its out-of-town stores.
Hit also by an accounting scandal, it issued four profit warnings in five months last year, and is expected to report a near 60% plunge in trading profit this financial year.
With net debt of about £7.5bn (€9.6bn) versus equity of around £16.8bn, Mr Lewis said the firm needed to cut back.
He said it would slash capital spending to £1bn next financial year, compared with the near £5bn it spent as recently as 2008-9, and close 43 unprofitable stores as well as can 49 planned openings.
With plans to close the firm’s head office in Cheshunt, north of London, and shut the final salary pension scheme, Mr Lewis said annual costs would fall around £250m a year.
He declined to put a figure on job losses, and said head office functions would transfer to another site.
Mr Lewis said Tesco would focus on lower, and simpler prices, with fewer promotions that have confused shoppers and frustrated suppliers alike.
