Analysis: Tesco aims to 'unlock new growth' with Booker

Years have elapsed since the boss of Britain’s biggest retailer could stand in front of City analysts and journalists with the same sense of pride, satisfaction and swagger that Dave Lewis displayed at the London Stock Exchange this morning.

Ever since the string of profit warnings that blighted the tail end of Philip Clarke’s disastrous tenure, the incumbent of the Tesco throne has given his financial and strategic presentation with his back, at least partially, against the proverbial wall.

The September 2014 profits scandal, the resulting fraud trial involving three now ex-Tesco executives, and a loss of trust among customers, staff and suppliers put the grocer on the back foot – and left Lewis with some tough challenges.

“Strategic progress has been made on all six of Lewis’ key strategic drivers”

But even as it cleaned up its act – revamping supplier terms, improving employee pay and championing the customer by lowering prices and introducing new own-label brands – Tesco has never been far from a storm.

The closure of its Cardiff call centre with the loss of 1,200 jobs, issues at the 2 Sisters chicken processing factories and shareholder unrest over the Booker deal were just some of the flies that fell into the ointment of an improving business.

But today, with three full financial years under his belt, Lewis was finally afforded some clear blue sky to reflect on a job well done to date.

Strategic progress has been made on all six of his key strategic drivers.

Tesco is constructing a differentiated brand for itself, powered by its work on improving product quality, reducing prices and establishing new and attractive own-brand ranges.

The grocer’s NPS score – a measure that Lewis has tracked with interest throughout his tenure – has improved from 38.7 in 2014/15 to 53.7 this year.

Its quality perception among customers has almost doubled to 24.7 over the same time, while value perception is up to 18.8 – nearly three times as good as it was three years ago.

Innovation

The grocer has put its foot to the floor on innovation. It created its Brand Guarantee to give shoppers immediate discounts at the till, revamped Clubcard, introduced the Pay+ app and handed out free fruit to children in stores.

Lewis highlights the creation of its entry-level Farm brands as “the most significant” investment in innovation Tesco has made during his reign, but ‘Project Atlas’ – an overhaul of its other own-label ranges – has sparked the creation of further new labels including Hearty Food Co and the introduction of exclusive products such as the Wicked Kitchen vegan range.

Tesco has made £820m of cumulative cost savings towards Lewis’ target of £1.5bn, £541m of which have been established through sweeping changes to its store operating model.

A further £104m has come through logistics and distribution, while £174m has been saved on goods not for resale.

In the past three years, Tesco has generated £7.6bn in cash from operations and is on course to achieve Lewis’ £9bn target by 2018/19.

“It… puts us firmly on track to deliver our medium-term aspirations we have”

Dave Lewis, Tesco

It is also creating value from its property, acquiring more of its UK stores – it now owns 52% of freeholds – releasing £1.4bn from the sale of property, and repurposing 2.6m sq ft of space across the group through partnerships with third parties such as Arcadia, Dixons Carphone and Holland & Barrett.

Finally, and perhaps most crucially, Tesco’s improving performance has allowed it to make significant margin gains, which have increased at a group level from 1.8% in 2014/15 to 2.9% in 2017/18.

It is not just margins that rose last year.

Group operating profit, Tesco’s preferred measure of financial performance, grew 28.4% to £1.64bn in the year to February 24.

Group sales advanced 2.3% to £51bn and UK like-for-likes climbed 2.2% across the year – including a ninth consecutive quarter of growth at the end of the year.

“It’s a very strong set of results and puts us firmly on track to deliver our medium-term aspirations we have,” Lewis confidently concludes.

Those medium-term goals are focused on “creating the UK’s leading food business” via its £3.7bn acquisition of wholesale titan Booker, which officially completed five weeks ago.

“We’ve talked about it for a very long time, and Charles [Wilson] and I have talked about it even longer, but it is only five weeks old,” Lewis cautions.

But he has wasted no time in shedding some light on the opportunities that lie ahead for the businesses as they come together through the enlarged group’s ‘Joining Forces’ integration plan.

Sharing SKUs

The first of those is in range optimisation – leveraging Booker’s larger, catering-sized packs to sell in Tesco stores, and stocking some of Tesco’s own brand products in Booker’s cash and carry business and through its convenience fascias.

“There are some things that are sold in Booker that are not sold in Tesco that would be unique, different and very appealing to Tesco customers, and vice versa,” Lewis says.

“We will take ranges that are available in Tesco but are not in Booker and introduce them into Booker”

Dave Lewis, Tesco

“The team have already identified 30 products in one business that we should try in the other. Booker has actually become a supplier so that we could list 30 SKUs in a couple of large stores. Five weeks in, we are happy with those sales.

“In the next wee while, we will take ranges that are available in Tesco but are not in Booker and introduce them into Booker to see how they respond to customers of that business.”

Lewis suggests products such as ready-made mashed potatoes or dauphinoise potatoes could be “very interesting” in a catering marketplace, “but they don’t exist today”.

Wilson, now in place as Tesco’s UK boss, says Tesco’s ranges in categories such as baked goods could also translate well into the Premier, Budgens or Londis convenience shops Booker supplies, but would need to be repackaged to feature the symbol groups’ independent branding, which “takes a bit more time” to implement.

Sharing resources

Tesco has repurposed around 600,000 sq ft of excess space in its larger stores across the UK over the past three years, but the combination with Booker represents another opportunity for the supermarket giant.

At the end of February, it opened a Chef Central shop-in-shop inside the Tesco Extra in Bar Hill, Cambridgeshire, serving catering professionals with bulk goods such as giant tins of beans.

Lewis said Wilson and Tesco’s chief product officer Jason Tarry had already used the store to show suppliers “some of the examples of what we might do together”.

“It would absolutely be possible with Booker’s Chef Central customers to use the grocery home shopping vehicles we have”

Dave Lewis, Tesco 

Although Lewis didn’t commit to how many more Chef Central shop-in-shops Tesco could roll out, he hinted that it was relatively high on the grocer’s agenda.

Similarly, Lewis nodded at the potential of “expanding the delivery offer” of the combined Tesco and Booker powerhouse to make better use of the company’s fleet of drivers.

“It would absolutely be possible with Booker’s Chef Central customers to use the grocery home shopping vehicles we have to deliver to professional outlets at times when we do not deliver to domestic customers,” Lewis explains.

“Most professionals who want a delivery want a delivery before 7am. None of my customers want a delivery before 7am. We could use the same fleet, from the same store, to expand our delivery options.”

Boosting sales

With such initiatives poised to emerge in the coming months, Lewis believes the combined business is well-placed to “unlock new growth”.

Today, now that rules over what could be stated in the deal prospectus have lifted, Lewis was able to place a target on the revenue growth the enlarged company could achieve over the “medium term”.

“We have an aspiration of £2.5bn of revenue growth that comes out of what it is the combined business can do going forward,” Lewis states.

“We haven’t delivered it yet, but that’s an idea of what we think that opportunity is.”

A punchy target it may be, but given Lewis’ record over the past three years, the forecast is looking a whole lot brighter at Welwyn Garden City.