Tesco CEO Ken Murphy. Picture: REUTERS/PARSONS MEDIA
Tesco CEO Ken Murphy. Picture: REUTERS/PARSONS MEDIA

Ken Murphy, new CEO of Tesco, finds Britain’s biggest grocer in much better shape than his predecessor did when he took charge. It  prospered during the pandemic, helped by its big out-of-town stores and ability to ramp up online capacity much faster than its more fashionable internet competitor Ocado Group.

Taking the helm of a company in relatively decent health brings its own challenges. When Dave Lewis became CEO six years ago, he faced the worst crisis in Tesco’s 101-year history after an accounting black hole created a £250m profit shortfall. But it was obvious what he needed to do: right the ship, strengthen the balance sheet and fight the mounting threat of German discounters Aldi and Lidl.

Murphy does not have such a clearly defined emergency mission. Tesco is chugging along nicely, forecasting on Wednesday that this year’s retail operating profit from continuing operations would probably be at least as good as last year’s. That’s despite the £725m extra cost to Tesco of managing the pandemic.

The new boss, a former senior executive at Walgreens Boots Alliance, still has much work to do — including narrowing Tesco’s stock market discount to Ocado, an online-only grocer that also licenses its technology to other giant supermarkets. This year, Tesco shares have slightly underperformed brick-and-mortar rivals such as J Sainsbury. 

Murphy says new fulfilment centres in big stores for online deliveries will be a game-changer for his company, helping it to chip away at Ocado’s position as web grocer of choice for Britain’s middle classes.

Elsewhere, there’s more value to be wrung out of the near £4bn purchase of wholesaler Booker in 2018. Tesco used Booker’s vehicle fleet to provide an extra 100,000 click-and-collect slots during the pandemic. Murphy will also have to make a call on whether to close or expand Tesco’s Jacks value chain.

And he could offload Tesco’s bank, which has never lived up to its promise. Murphy says there are no plans to sell the lender, but it’s an obvious source of cash if that were ever needed.

The chief criticism of Lewis is that he didn’t cut prices quickly enough to meet the threat of the German discount giants. Due to Aldi’s lack of a serious online business, Tesco has used the pandemic to win customers from it for the first time in a decade. This advantage will not last forever, particularly if the British economy deteriorates. Aldi UK said recently that it wouldn’t be beaten on price.

Murphy appears to be acutely aware of the need to keep his foot on the price-cutting pedal. And he has the balance sheet firepower to do this. Net debt including store leases fell slightly to £12.5bn in the first half, while Tesco generated free cash flow of £554m from its retail operations.

Eking out incremental sales growth and slogging it out daily with the no-frills supermarkets is hardly the stuff of retail management dreams, especially when compared with Lewis’s rescue job. But if Murphy can fine-tune Tesco — and use its strong cash generation to return even more capital to shareholders — they’ll forgive the lack of fireworks.

Bloomberg

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