Clarke needs to convince UK still offers growth for Tesco

In a note outlining the five key issues it believes Clarke needs to address when he takes charge next months, analyst James Anstead said the City is “very concerned” at potential problems facing the core UK business and Clarke should “calm fears on the domestic market and better highlight the numerous growth avenues for the group”.

Tesco has been derated sharply over the last three years and the shares apparently reflect fears of a decline in core UK margins or no margin improvement outside the core business - both scenarios Anstead described as unlikely. He said Clarke “should be able to calm fears”.

Anstead said: “The market is very concerned about excess capacity and the potential for a price war. If he can persuade the market that there is no need to panic then there should be considerable upside.”

He noted that over the last decade non-food has been a big sales and profits driver for the UK business, but it did not perform as it would have hoped over Christmas.

Anstead said while that was partly a consequence of the bad weather, “Tesco is prepared to admit that its non-food offer has perhaps become a little dull”.

Sorting out the non-food offer has now been handed over to Laura Wade-Gery’s replacement Per Bank. “In addition to improving non-food within stores, we think Tesco will also be keen to broaden its assortment even more dramatically online,” he said.

Tesco’s international business is growing at twice the rate of the UK, said Anstead, and in the year ahead the retailer expects it to generate sales similar to Sainsbury’s entire UK business, and deliver greater profits.

Anstead said listing individual business units could be one way to convince the City that Tesco’s international business deserves a higher premium. He said separate international listings might enable those businesses to trade at a higher multiple, but one downside could be that it would require more information disclosure, which would be analysed by competitors.

He said Tesco Korea would be a suitable listing because it generates about 10% of group operating profits.

Anstead said Clarke should also highlight the value of the group’s real estate - perhaps by a separate real estate listing - balance growth with improving cash flow, and convince the City that Tesco is financially transparent given its variety of divisions, such as banking.