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source from：ft
Tesco boss runs into wholesale problems
Dave Lewis’s attempt to buy Booker Group is first flashpoint of tenure at UK grocer
7 HOURS AGO by: Mark Vandevelde
By the standards of Tesco’s past expansions, it is hardly an outlandish plan: Britain’s biggest retailer is to transcend its supermarket origins by becoming a food wholesaler as well.
But chief executive Dave Lewis’s attempt to buy Booker Group has become the first flashpoint of his tenure. Two major investors sounded the alarm this week, upbraiding the Tesco boss for channelling the retailer’s cash into an uncertain venture before dealing with the inferno he was hired to extinguish.
The argument began even as Mr Lewis halted some of Tesco’s previous strategic excursions, such as the Hudl tablet computer and its moves into the coffee shop and restaurant markets, begun during his predecessor’s disastrous three-year stint. Critics say Tesco should focus on proving it can once again make decent profits from its core business.
Mr Lewis is adamant that buying Booker, which supplies convenience stores and restaurants in the UK and also has an Indian cash-and-carry business, is part of Tesco’s recovery, not a distraction from it.
“Suppose I just focus on now and we secure the turnround,” he tells the Financial Times. “In three years' time they’ll say, ‘What comes next, Dave? Where does the growth come from?’ If I say, ‘Hold on a couple of years while I come up with an idea’, they’re not going to be all that forgiving.”
Before the Booker announcement, Mr Lewis’s biggest ideas had centred on reforming a supermarket whose relentless focus on profits had alienated shoppers and suppliers and created the kind of noxious corporate culture where questionable accounting practices could persist for long enough to force a ￡326m profit restatement.
Analysts say the rot set in when Tesco began making an increasing share of its money from suppliers, rather than shoppers. As the retailer concocted complex deals that supplemented its profits with listing fees and paid-for promotional activity, executives took their eyes off customers.
1. July 2014: Dave Lewis appointed new CEO
2. Sep 2014: Reveals it overstated first-half results by ￡250m
3. Oct 2014: SFO launches accounts probe
4. Apr 2015: Slides to record ￡6.4bn annual loss
5. May 2016: Awarded ￡3m after recovery beats expectations
6. Jan 2017: Swoops on food supplier Booker in ￡3.7bn deal
5. Mar 2017: UK arm to pay ￡129m over accounting scandal
Mr Lewis this week began to draw a line under the legal fallout from the 2014 accounting scandal as Tesco Stores agreed to pay a ￡129m penalty to avoid prosecution and offered compensation to investors who bought shares in the weeks after the flawed profit numbers were published. The deal neutralises the threat of a criminal prosecution against Tesco Stores, although does not address whether liability of any sort attaches to the parent or any employees or agents.
Mr Lewis’ new formula for the retailer is to combine lower prices with a more constructive approach to suppliers.
“It used to be that I couldn’t get good quality people to work on the Tesco account, because they knew they’d have the crap kicked out of them in every engagement,” says one Tesco supplier, who requested anonymity to discuss sensitive commercial negotiations.
That changed shortly after Mr Lewis took over. Deals that were once renegotiated every month are now good for between three and five years. “Subject to us delivering growth for them, they’re happy for us to make a decent level of return,” the person says.
The more collaborative approach leads to improvements that will be noticed by customers, says John Shropshire, chairman of G’s Fresh, which supplies salad vegetables to Tesco from farms across Europe.
“The old approach encouraged the wrong behaviour,” he says. “They’d try and take margin out of us in five or six ways. So they’d even try and take profit out of the trucks, which meant you bunched up your haulage, and the lettuces would take a day longer to arrive from Spain. The customer was getting something that wasn’t as fresh.”
Suppliers say Tesco still drives a hard bargain. The difference under Mr Lewis, they add, is that the supermarket now looks for new profitmaking opportunities that can be shared, instead of scrapping over the existing spoils.
Strawberries go on promotion when the harvest is plentiful, instead of on a timetable devised by the marketing department. Wonky vegetables are sold at a discount, or sent to food manufacturers. “The big one is onions, connecting us to the ready meals industry,” says Mr Shropshire.
Mr Lewis has been widely praised for putting Tesco on a more sustainable footing, moving away from a business model that relied on using Tesco’s huge scale to force through one-sided deals.
But the cost of the new approach has been sharply lower profits. Even after its partial recovery, Tesco scraped by on an operating margin 1.4 per cent last year, compared with the 5 per cent it routinely managed before 2013.
Mr Lewis argues that higher sales are the key to higher profits, and that Booker — which will add about 10 per cent to Tesco’s revenue line — is an attractive way to deliver it.
Fund managers at two of Tesco’s biggest shareholders disagree. So does Richard Cousins, the chain’s former senior non-executive director who argued that Tesco should make its business “simpler, not more complex” and who quit when the rest of the board made clear it would back the deal.
“Richard was opposed to this deal from day one,” says Tesco chairman John Allan, who added that he considered the deal from all angles before deciding to support it. “I shared his concern about certain aspects. I was keen to make sure they were properly taken account of in due diligence — and they were.”
Some retail executives have been taken aback at the public discord surrounding the Booker purchase. “It’s undoubtedly a problem for them that 9 per cent of their shareholders oppose it,” says one. “These are very early days and I’m surprised they’re facing such vocal opposition so soon.”
Mr Lewis says a majority of the chain’s biggest investors have increased their stakes since the deal was announced, and that he is prepared to weather the dissenters’ criticism.
“There are investors who bought at a time when the price was higher and clearly have suffered significant losses. They have a point of view and I really do listen to it,” he says.
“They say, ‘Dave, I really like what you’re doing. My concern is that you’ll be in some way distracted’. I respect their opinion. But I’ve run big, complicated businesses before. I’m confident that I can do both.”
Additional reporting by Arash Massoudi
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