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Tesco turnaround complete?

Daniel Lane

Daniel Lane - Fidelity Personal Investing

Job done. That was the sentiment from Tesco chief executive Dave Lewis this morning, as he announced his departure from the supermarket chain after five years at the helm.

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Lewis will be replaced by Walgreens Boots’ chief commercial officer Ken Murphy next summer, with the outgoing head saying: “now is the right time to pass the baton.”

In 2014, Lewis was drafted in to bring the shopping giant back to life after the emergence of the German discounters, and was tasked with rebuilding corporate trust after revelations of overestimated profits had tarnished the brand.

So, having hit group operating margin targets early and reviving the group’s performance, he has declared his tenure at the top over:

“Our turnaround is complete, we have delivered all the metrics we set for ourselves. The leadership team is very strong, our strategy is clear and it is delivering.”

He added: “With these firm foundations and a competitive, sustainable growth strategy in place, I have no doubt that Tesco will kick on again under new leadership next year.”

The news of Lewis’ departure came alongside the firm’s half-year results. Group operating profit was up 25.4% to £1.4bn, with profit before tax up 47.4% to £1.04bn across the board. Total debt came in £0.9bn down on last year to £14.7bn. And a commitment to growing the firm’s dividend means a 58.7% hike to 2.65p for investors.

It’s not news that most investors in the sector have been focusing on margin pressures among the big four supermarkets, especially since the arrival of Aldi and Lidl. Market share among Tesco, Sainsbury’s, Asda and Morrisons is down over two years but Aldi and Lidl have both grown, with Aldi up 2% to just over 8%, according to Kantar.

And while ventures like Jack’s, Tesco’s budget offering, are designed to beat them at their own game there may be other areas of interest to investors in today’s results.

The company included plans this morning that addressed the need to innovate in the supermarket’s online business. With Ocado leading the way in this lane, and helping others like Morrisons to get up to speed, Tesco was in danger of falling behind.

However, the firm announced its intentions to open three new fulfilment centres for online orders by 2020, with a view to operating around 25 over three years. Rather than continuing on a blinkered strategy to only roll out new superstores or convenience options, this updated strategy could mean greater efficiencies for the group over the next few years.

What’s more, customers and investors will be keen to follow the development of Clubcard Plus - a subscription service giving shoppers access to discount deals and exclusive special benefits, for a monthly fee.

Taking on the discounters might have felt necessary but there are signs the company has realised there is also a question about value here. With Clubcard Plus likely to offer deals on mobile phone subscriptions, petrol and just about everything else Tesco has over its budget competitors, this could be the new battleground.

With customers still not entirely sure about Jack’s, these new developments could be the differentiating factor, with subscription-happy customers ready to forego cheaper basic products for ease and savings on non-essentials eventually. Investors will hope Lewis’ turnaround is just the beginning.

More on Tesco

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