Tesco’s Lewis confident of margin recovery in 'next phase' of turnaround

The supermarket giant this morning unveiled plans to grow group operating margins to between 3.5% and 4% by the end of the 2019/20 financial year as part of its half-year update.

Lewis said the plan would be underpinned by six strategic drivers – including delivering an additional £1.5bn in cost savings over the next three years by improving its distribution network, leveraging its buying power and simplifying store operations.

Tesco will also plough an average of £1.4bn per year into the programme as it targets a margin recovery.

‘Stabilised’ business

According to the grocer’s half-year results, which revealed a 28.3% drop in statutory pre-tax profit to £71m, its operating profit margin stood at 2.18% across the group and 1.81% in the UK and Ireland.

Lewis said the plan to grow margins showed Tesco was “moving to the next phase of our recovery” after hailing the efforts of its workforce in “stabilising” the business.

And Lewis insisted he was confident the supermarket giant could deliver on its plan.

“We do believe that, after two years, we have stabilised the business. We believe that we have seen some signs of our competitiveness being established against the market place.

“We have some confidence in what we’ve done, but we’re very clear that it is just the start and there are many more things to do.”

“We have very real plans of how it is we get to 3.5% to 4% and we wouldn’t have shared that if we didn’t have a plan that we believe in.”

Dave Lewis, Tesco

Lewis added: “We wouldn’t put it [the margin target] out there if we didn’t have a very clear plan and approach that we think can realise it.

“Obviously, in business, nothing is guaranteed, but we want to share our ambition and what it is that we are trying to do.

“But I take some solace from history – two years ago you look at the margin in the business and we were loss-making in the UK market. We are clearly not now.

“From a place of being very significantly sub-1%, we are now at 2.2% and we’ve got to take that and move on.

“We have very real plans of how it is we get to 3.5% to 4% and we wouldn’t have shared that if we didn’t have a plan that we believe in.”

Pension deficit

Lewis and finance boss Alan Stewart are poised to reveal more details on its six-point plan at separate briefings with analysts and the media later this morning.

But they quashed claims that its ballooning pension deficit – which rocketed £3.2bn to £5.85bn – will hamper that strategy.

When asked if the black hole in the scheme had prompted the executive team to rethink their investment plans, Stewart insisted: “The short answer is no, it hasn’t.

“It’s very much an accounting measure. What we did is set out to protect the scheme, protect the commitments we’ve made and, with the trustees, agree a framework for long-term stability within the scheme.

“We’ve got the trustee agreement to pay £270m of the deficit every year and we have a valuation next March so we’ll see what it is then.”